SLT Annual Report 2002

LEADING MARKET

Sri Lankan Telecom (SLT) ended the year on a high note with an after tax profit of Rs. 2,685 million. This was up by 28% from a year earlier. Revenue grew by 15% and net assets at the end of year was Rs. 38,787 million.

SLT continues to lead the field in the telecommunications industry. Approximately 87% of the fixed line subscribers in this country were using SLT at the end of 2002. At the end of the year SLT had 768,620 direct exchange lines (DELs). The Company has doubled the number of DELs by adding 486,997 DELs over a five year period.

With its acquisition of Mobitel in October 2002, third largest mobile operator, SLT becomes the only integrated operator in this country to offer fixed line, data and mobile services.

The revenue generated from domestic telephony, as a proportion of SLT’s overall revenue, continued to grow in 2002. In 2002, as much as 55% of our revenue was generated from domestic telephony operations. This is an inevitable consequence of our tariff rebalancing policy and this trend is likely to continue for a few years. Approximately 77% of domestic telephony revenue comes from call charges.

THE MOBITEL ACQUISITION

In October 2002 SLT acquired Mobitel, one of the four mobile operators in the country. Previously, SLT had bought a 40 per cent stake in Mobitel, when the mobile operator commenced operations in 1996. In October 2002 SLT invested Rs. 922 million to Telstrar of Australia to acquire the balance 60 per cent. Mobitel currently has approximately 112,000 subscribers and a 18 per cent slice of the mobile market in the country.

Mobitel currently operates an AMPs network. Over the next few years Mobile will commence a phased transfer of its subscribers from its AMPs network to a state-of-the-art GSM network. The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) has given us an assurance that Mobitel will be able to operate a GSM mobile service. The BOI has approved the continuation of the tax exempt status of BOI after SLT’s purchase of that company.

The future expansion and development of Mobitel will be an important part of SLT strategy for the next phase. Over the next few years SLT will focus on transforming Mobitel into a state-of-the-art mobile operator and will actively seek to increase its customer base.

The Mobitel acquisition has placed SLT even further ahead of other service providers. Currently SLT is the only operator in this country to offer integrated voice, data and mobile solutions. Coupled with our countrywide digital transport network, our computerized billing system and our standards of customer care, SLT is well placed to create new markets while offering new solutions.

THE SLT IPO

Our Initial Public Offering (IPO) in November 2002 raised Rs. 3,249 million. This was one of the biggest public offering that the local market has witnessed.

As a result of this IPO the ownership of SLT has undergone a radical change:

Government of Sri Lanka	49.5%
NTT Communications Corporation	35.2%
Public	15.3%

SLT became the largest listed company in the Colombo Stock Exchange with this IPO. The IPO has broadbased our share structure.

ALLIANCE WITH NTT

NTT Communications Corporation has been our strategic partner as we have transformed from a lethargic state entity to a dynamic state-of-the-art service provider. Our alliance began when NTT bought a 35% slice of the Company in 1997. This was accompanied by a management agreement through which NTT agreed to provide strategic management advice and training to SLT. The NTT stake was subsequently transferred to NTT Communications Corporation.

The alliance blossomed during these five years and is reflected in the transformation that has occurred in SLT’s management culture and performance. From a top heavy and loosely focused organization SLT has metamorphosed into customer driven, technologically innovative and lean entity.

NTT has provided strategic advice and support in a number of areas: network design, service platforms and information technology. It has also assisted in strengthening operating and financial reporting systems and controls.

The NTT service agreement ended on 4th August 2002. However, further to a shareholders’ agreement NTT Communications Corporation has nominated four members to the SLT Board. The CEO and Chief Financial Officer are also nominees of NTT Communications Corporation.

GROWING WITH OUR NETWORK

SLT will continue to modernize and strengthen its network as it gears for an anticipated demand of its products. SLT’s fully digital transport network covers most of the country, except some areas of the North and the East. We hope to re-establish access in those areas as normalcy returns. In the North and the East, providing a conducive environment exists, SLT will focus on installing cost effective cable and wireless local loop networks in a bid to meet the demand in those areas.

At the end of 2002 SLT’s network consisted of over 500 digital exchanges divided into 29 area codes each served by a secondary switching centre. The secondary switching centres are in turn connected to four tertiary switching located in Colombo, Kandy, Galle and Anuradhapura. These four centres connect to the national centre in Colombo. Trunk transmission between secondary and tertiary switching centres is mainly through microwave link.

A number of network expansion projects are in the pipeline. These include a project to increase the switching capacity in the Colombo Metropolitan Area by 109,050 lines and an upgrade of the transmission system.

EXPANDING OUR INTERNATIONAL OPERATIONS

In these five years SLT has considerably strengthened its international network with a view to enhancing its global connectivity and international traffic routes.

Its current network consists of three gateway exchanges, two cable landing stations, three satellite earth stations and one mobile earth station. This network is supplemented by the access that SLT has to two submarine cables: SEA-ME-WE II and SEA-ME-WE III.

In September 2002 SLT entered into an understanding with 12 other international operators to collaborate on the construction of a new SEA-ME-WE IV submarine cable which is expected to go into operation in 2004.

In October 2002 SLT signed an agreement with Bharti Telesonic of India in a bid to strengthen traffic between the two countries. Interconnection will be provided through SEA-ME-WE III and Network i2i in Singapore.

The Company’s international operations will be strengthend by the establishment of points of presence outside Sri Lanka to offer termination, hubbing and transit services to overseas telecommunications service providers.

SLT is a recognised training resource provider to Commonwealth countries, on par with the UK, Australia, Canada and Malaysia.

Since 1997 SLT has pursued a policy of rebalancing tariffs between domestic and international rates so as to reflect the actual costs of these services. This policy will be continued and in early 2003 international rates were drastically reduced.

MAINTENANCE

SLT upgraded its maintenance capabilities in 2002 by installing four centralised outside plant maintenance centres (OPMCs) in the Colombo Metropolitan Area. Nine more will be established during 2003 and further strengthen our maintenance capability. OPMCs enable an automation of systems and a pooling of resources. This keeps human resource costs down and provides for a more efficient and cost effective system all round.

The fault rates and fault clearance rates have continued to improve over the past five years. SLT has put in place a comprehensive maintenance management plan developed in connection with NTT Communications Corporation. This has been boosted by an increased emphasis on maintenance training of SLT’s technical staff.

In 1998 SLT set up a fault reporting call centre and has now put in place centralized fault reporting management systems. Our maintenance capabilities are further enhanced by our large maintenance fleet islandwide.

TELESHOPS

Our teleshops have revolutionised telecommunications marketing. Our first four teleshops were opened in 1997 and another 19 have been established since then.

These teleshops are one stop centres and perform a variety of functions. Customers may pay their bills, lodge a complaint, register for a new telephone or invest in a range of new equipment, in a customer friendly environment. The goal has been to create a customer friendly environment at a single location and provide a wide range of services at this single location. This has increased levels of customer satisfaction and generated enormous goodwill.

INTERNET CUSTOMER BASE GROWS

Our Internet customer base grew by 23% in 2002. SLT’s internet service was launched in 1996 and by the end of that year we had 1,200 customers. Our service was re-launched in 2000 as SLTNet and as part of this re-launch SLT set up a help desk and lowered its rates.

Our customer base has now grown to 40,705 a growth of 93% in two years. Our internet marketing strategy has been to offer competitive pricing, a high quality of service and high speed access.

SLT has points of presence (POPs) across the country and this allows our subscribers to access the net for the cost of a local call. SLT’s international IP (Internet Protocol) backbone bandwidth is 90 Mbps.

SLT currently offers Internet leased lines at 64 kbps, 512 kbps, 2 Mbps, client mail service installation, web and DNS hosting as well as POP internet service.

Internet customers are now provided with an E fax service enabling them to direct their mails to fax. Internet Roaming was introduced in 2000 and this created an interest particularly among those customers who travel frequently. It enables them to use their Internet account while travelling. The Roaming Service is now available in 150 countries through 15,000 ISP POPs. Web Hosting, DNS Hosting and Top Level Domain Name Registrations are some of the other services customers have access to.

SLT Broadband took off the ground with successful telemarketing in Slave Island. The SLT Broadband will consist of 512 kbps and 2 Mbps download services along with 128 kbps and 512 kbps upload speeds respectively.

MOVING TOWARDS MORE VALUE ADDED SERVICES

Over the next few years SLT will develop its existing value added services and introduce new services so as to increase our subscriber base and generate more revenue.

We will focus on promoting our existing services such as IDD, voicemail, call waiting, call forwarding and other packaged service offerings. Itemised billing and on line billing services will be introduced in due course.

We propose to increase our revenue from international operations though the wider use of calling cards, pre-paid cards, post-paid cards and budget IDD services to users in Sri Lanka and abroad.

DATA SERVICES

SLT provides data services under the brand name SLTData.

SLT’s data circuits have a capacity of 64 kbps and 8 Mbps. Our services include national and internationals leased circuits, frame relay solutions and internet leased circuits. Customers include mobile operators, data service operators, internet providers, software developers, banks and other large corporations. At the end of 2002 we had approximately 2,800 data customers.

SLT will leverage its fibre optic infrastructure to provide IP-based services such as SLT Broadband, IPVPN and Internet data centres. These new products will be aimed at the high usage corporate customers and will increase our network utilization. In addition we hope to put in place an IP backbone covering the Colombo Metropolitan Area by mid 2003 and in the other areas by the end of 2004. The IP backbone will be connected to global networks through SLT’s international gateways.

REGIONAL PERFORMANCE

For operational reasons SLT is divided into four regions:

Metro which consists of Colombo and its suburbs,

Region 1 which consists of the Central, Western / North, North Western and North Central provinces,

Region 2 which consists of the Uva, Southern, Sabaragamuwa and Western / South provinces and Region 3 which consists of the Northern and Eastern provinces.

METRO REGION

30,360 new customer lines were provided in 2001 taking the overall Metro customer base to 345,087. The metro region is one of the most important regions for SLT. It accounts for 45% of SLT’s total customer base and 48% of SLT’s revenue.

ZERO FAULTS IN THE METRO REGION

Metro Region achieved a major milestone in 2000 when all faults reported within the day were completely cleared. The achievement of Zero Faults Status (no unattended fault left overnight) was a significant achievement for SLT and is a standard we intend taking to other regions over the next few years.

This landmark was achieved through a number of preventive measures which included keeping the number of faults down, and training our staff to respond to faults promptly. In 2001 we increased our fibre optic network to key customers and enhanced the number and quality of our maintenance vehicles.

In 2002 we set up four centralised outside plant maintenance centres (OPMCs) in the Region. Nine more will be established during 2003. We propose to connect our maintenance vehicle through a radio network during 2003.

REGION 1

Region 1 consists of nine RTOM areas: Kandy, Gampola, Matale, Kurunegala, Chilaw, Anuradhapura, Polonnaruwa, Negombo. During 2002 the customer base increased by 19,590 and brought the total number of customers in the region to 211,986 by the end of the year.

REGION 2

Region 2 consists of 11 RTOM areas: Kegalle, Avissawella, Ratnapura, Badulla, Bandarawela, Hatton, Nuwara Eliya, Kalutara, Galle, Matara and Hambantota.

16,174 new connections were established in 2002 bringing the overall customer base in the region to 173,186.

REGION 3

One of SLT's strategies over the past few years has been to develop the switching and transmission capacities in difficult areas. With this in view SLT has embarked on a major infrastructure development programme in those areas.

In Jaffna, 967 new connections were provided during 2002.

A total of 3,850 new connections were provided in the region during 2002.

INFORMATION TECHNOLOGY

SLT is progressively improving its IT infrastructure through the enhanced use of computerized information systems. Currently finance functions, human resources administration, procurement and inventory management, billing, fault reporting and new connection management operate on separate systems. Our plan is to have an integrated system for these functions which would ensure greater accuracy and more efficiency. A new billing system and customer care system will be in operation by the end of the year.

The headquarters and all regional offices are linked by Intranet. Each department maintains a web page and dissemination of information among the different offices and departments has increased significantly.

HUMAN RESOURCES

We recognize that our greatest resource continues to be our employees. We are committed to provide a friendly working environment to encourage their personal involvement and development.

SLT would like to create an environment for its staff that is productive, satisfying and creative. A job in the Company should not be a mere source employment, but a career and a part of a lifestyle. It is with the intention of creating a ‘total environment’ that a review of its human resource systems has been initiated.

During 2002 our human resource training policy focused on customer orientation; team building; interpersonal cooperation; workplace cooperation; IT skills; communication skills; productivity improvement and attitude development.

In a clear endorsement of the Company’s HR practice, SLT was selected as the 2nd Runner Up in Human Resource Management in a competition run by the Post-Graduate Institute of Management of the University of Sri Jayawardhenapura.

In the first phase after privatization senior management was given priority. This has now changed and our training schemes have been broadened to include middle and junior level management and technical staff. Where our in-house training capacities are insufficient we use external consultants.

Our human resource strategy for the short term will focus on a better utilisation of existing human resources. One of the tasks in the near future will be to review job profiles and to look at ways of improving employee relationships and communication skills.

The major focus of these initiatives exercise will be to trigger initiative and to reward dynamism and creativity. To us as at SLT learning is a continuous process and this is another value we are trying raise. We will continue with our transformation into a customer oriented enterprise that provides customers with consistent and high quality service.

Another of the strategic concerns at SLT is our recruitment procedures and its procedures. In the future the recruitment of personnel will strictly be a needs based exercise. Because SLT offers a satisfying and rewarding environment the productivity levels of our staff are high as reflected in the staff productivity ratios.

Our new human resource policy includes increased outsourcing of non-core functions and rationalization of our cadre through voluntary retirement schemes.

A number of other measures have been implemented to ensure that SLT’s work culture is more performance and profit driven. Apart from new training programmes, annual performance appraisals and Japanese productivity improvement measures such as ‘Kaizen’ and ‘5S’ have also been integrated. Promotions are now based on competitive examinations which have created a learning culture in the organization.

SLT currently has 33 unions. Sixteen of these have formed an umbrella organization, the Joint organization of Telecommunication Trade Unions. Currently no formal collective bargaining agreement exists with the unions. However, SLT has struck a number of informal agreements with the unions on wages, bonuses and related matters. The current state of industrial relations is harmonious and the management and employees have been able to resolve disputes amicably.

Several employee involvement programmes have been initiated. This included a collaborative management programme sponsored by the International Labour Organization. As a result local and regional discussion groups between management and the staff have been set up to encourage participatory management and to resolve conflicts through dialogue and negotiation. This has created an entirely new work ethic in the organization based on mutual understanding and cooperation and has created win-win situations for both management and employees.

Our new human resource policy will focus on developing a committed and dynamic workforce which can adapt to the latest technologies. It will facilitate the emergence of a company with the right size and optimal number of employees. We will aim to foster an organizational climate which supports higher productivity through improved workplace cooperation. Key competencies of our employees will be enhanced to keep pace with technological developments. Developing a learning and knowledge based organization with state-of-the-art solutions, will be one of the main drivers of this new policy.

EVOLVING A RESPONSIBLE CORPORATE CITIZENSHIP

Good corporate citizenship demands good values and at SLT we are committed to creating a better society for us all. While wealth creation is one of the primary motivating forces we are also conscious of our role in enhancing the social wealth of the entire society. We are conscious of the strategic role we play as the major provider of voice and data communications in this country.

This is why while seeking to infuse quality into every aspect of our production process we have tried to ensure that this quality percolates to society in general. Good corporate citizenship demands social responsibility. The creation of a content and satisfied consumer base is of vital importance to our longer term strategic goals and we are dedicated to spreading the value of this responsibility.

Web Spinners Unite

Giving tangible form to this aspect of our business, SLT launched “Web Spinners Unite” – a programme for students, conducted in collaboration with The Chartered Institute of Management Accountants (CIMA) introducing them to the wonders of new age communication and information technology. Subjects such as the Internet, e-Commerce, e-Learning, Career Guidance on the Internet, the New Economy, Payment and Security, Web Design for e-Commerce and Internet Marketing Basics, were explained and students were afforded hands-on experience in these areas. “Web Spinners Unite” ran in Kandy, Galle, Colombo, Nikeweratiya, Jaffna, Vavuniya and Ratnapura.

SLT’s commitment to social responsibility also encompasses care for the environment. It is a sad fact that today, all manner of flora and fauna are threatened with extinction through man’s irresponsible and thoughtless actions. The Company seeks to raise awareness of the plight of species of endemic birds of Sri Lanka, whose numbers are dwindling by the year. As our mite towards their cause, we featured 12 out of 23 endemic birds in our wall calendar for 2003. We’ve also featured them on the screen saver and as wall paper on our website – www.slt.lk.

Our role as a responsible corporate citizen of Sri Lanka takes many forms. From donating school books to disaster relief, career development programmes such as the one we ran in collaboration with The Chartered Institute of Management Accountants, Chartered Institute of Marketing, Institute of Personnel Management Sri Lanka (Inc.) and The Institute of Chartered Secretaries and Administrators in Sri Lanka in four districts and blood donation campaigns, SLT is committed to the welfare of Sri Lanka and its people.

CORPORATE GOVERNANCE

Accompanying corporate responsibility is an effective system of corporate governance. To guarantee shareholder rights we have put in place an effective system of checks and balances through our new corporate governance structure. This has included the appointment of 4 eminent personalities as non executive directors, the establishment of an Audit Committee and a Remuneration Committee and the adoption of a transparent process of management.

We have been guided by the Code of Best Practice issued by the Institute of Chartered Accountants and have through our systems of corporate governance sought to balance at all times our corporate objectives with shareholder accountability.

PRODUCTIVITY AND QUALITY

One of the key distinguishing characteristics of a successful company is a high level of productivity. SLT launched a concerted drive to achieve greater productivity, across the organization. We are happy to report that SLT won the 2nd Runner Up Prize at “National Human Resources Management 2002”, a competition held by the Post Graduate Institute of Management (PIM) of the University of Sri Jayawardenapura and the Institute of Personnel Management (IPM). SLT won for its function as a major partner contributing significantly to Sri Lanka’s economic infrastructure. It was also rewarded for making a successful transition from a Government institution into a more private sector oriented company.

One of the key drivers that helped SLT win this award was the “5S” and “Kaizen” programs put in place to achieve efficiency and quality. The successful implementation of these programs achieved great recognition as SLT swept the board at Taiki Akimoto 5S Awards Ceremony held recently. SLT won 13 awards and 2 Certificates of Excellence, competing against many prominent government and private sector institutions. We were thus adjudged Overall Winners.

The aims of the competition are to reward outstanding and innovative achievements in pursuing quality awareness and productivity.

CREATING A SLT BRAND

SLT has emerged as a truly Sri Lankan brand and a brand that Sri Lankans will view with pride. We are in the process of seeking legal protection for this brand.

Our brand identity is a fluctuating one, as new products and services emerge, flourish and get disseminated. We will continue to build value for our brand and maintain it as a brand that symbolizes quality and appeals to those in both rural and sophisticated markets.

THE WAY FORWARD

As we commence 2003 we are confident that the processes of change unleashed in 1997 will continue. There are strong signs that the economy is beginning to recover. Economic growth coupled with increasing investor and consumer confidence will be the external catalysts. Internally we will continue to refine our systems, enhance customer support and access the very best in technology.

The telecommunications regulatory environment in Sri Lanka is undergoing big changes. A new draft policy on telecommunications has been released by government and SLT is in the process of studying this. It is likely that the industry will be further liberalized and more operators are likely to enter the market. SLT is gearing to meet these challenges.

My thanks to our employees for another productive year. Their contribution has yet again been a strong one. My thanks also to the Board for their support and to the TRC for the cooperation they have extended. We look forward to another rich year.

Shuhei Anan
Chief Executive Officer