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Management
Discussion and Analysis - Risk Mangement |
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Over
the years, the world’s wider stakeholder community have
increasingly come to demand greater transparency from commercial
entities as to the stability and viability of their enterprise.
People want to be re-assured that companies are responsibly
administered and are doing everything in their power to keep
businesses viable by protecting them against risk, which if
unaddressed adequately could lead to ultimate demise of the
business and loss to stakeholders.
Every commercial enterprise is exposed to risk in some shape
or form, which if unmitigated, would adversely impact on its
business and assets.
Therefore, it is in their interests to put in place a “Risk
Radar” to identify in a timely manner, the potential situations
and events that could pose a threat to their organisations.
The next step would be to enact a timely and effective Risk
Management regime, which by being pro-active and applying mitigating
controls in timely manner, would at the very least minimise
losses to the Institution, whilst at best prevent it entirely.
Sri Lanka Telecom has put in systems, policies and procedures
in every key area of operation which identify, measure and monitor
risks to its business, whilst enacting management and mitigation
of such risks.
In this chapter, we present an account of areas of potential
risk to SLT’s business and the measures we have in place
to address and mitigate them.
Regulatory
SLT’s telecommunications business is subject to governmental
regulation in regard to licensing and competition as well as
costs and arrangements pertaining to interconnection and tariffs.
Changes in governmental policy have potential to affect the
financial status and operational results of the Company.
Any decision taken by regulatory authorities to amend and/or
revoke the Company’s telecommunications licences can adversely
affect us.
Against a backdrop of an increasing deregulation of the telecommunications
industry, two successive Governments of Sri Lanka, i.e. pre-2004
and post-2004, have deliberated on far reaching change in the
regulatory framework of the industry. At the time of writing,
there has been no ratification of change. This places SLT’s
business planning within a climate of uncertainty with possible
material adverse effect to the Company.
Also in the light of such impending change, a potential risk
area opens up in the future, when the Company's licence expires
in 2011. We are then open to yet unknown licence issuance requirements
which may or may not prove favourable to our business.
SLT, being the dominant fixed line operator in Sri Lanka, is
required to subject its tariff structures for the prior approval
of the Telecommunications Regulatory Commission of Sri Lanka
(TRC). Other fixed line operators are not subject to this procedure
and their tariff structure establishment could be set up without
restriction with notice to the TRC. Further, the Company’s
tariffs also come under the purview of the Consumer Affairs
Authority.
The absence of a “level playing field” plus the
potentially adverse repercussions from possible external control
or influence of the Company’s tariffs could pose a threat
to SLT’s continued profitability.
In the field of Mobile Telephony, Mobitel has been provisionally
granted a frequency allocation with which to commence GSM services,
by the TRC. However, the TRC whilst awaiting the clearance of
point to point links of other operators, has not fully transferred
frequency bandwidth formally, to Mobitel. Should a situation
arise where Mobitel will not have continued access to the frequencies
it enjoys now, this will pose a threat to the viability of our
mobile communications operations.
Another area of uncertainty lies within the enactment of a Government
directive requiring international operators to pay Incoming
Local Access Charges (ILAC) and Outgoing Local Access Charges
(OLAC) to the domestic operators on whose networks the international
call either originated or was terminated. At present ILAC and
OLAC are being paid directly to the domestic operators.
With various permutations and schemes being proposed within
the industry in this regard, the amount of levy that SLT would
be required to pay to the TRC has yet to be determined. The
Company made a provision in a sum of Rs. 2,067 million in its
September accounts towards payment of the levy, assuming the
required rate to be fixed at US$ 0.38 per minute.
Should the Company be required to revise this rate upwards,
it could affect our results of operation and financial condition.
In coping with regulatory issues, SLT maintains a healthy dialogue
with the TRC, keeping the channels of communication open at
all times.
Competition
The market for telecommunications services in Sri Lanka is a
highly competitive one.
We are operating within an era of deregulation, which is opening
up the industry to new operators and all the attendant market
forces of product, price, technology and service parrying amongst
service providers.
This is, in principal, an extremely healthy approach and one
that holds great benefits for the consumer.
SLT enjoys a market dominance in terms of fixed line subscribers
as is borne out by its 87% market share. In mobile communications
the Company enjoys a 19% market share.
There can be no assurance that the level of existing and future
competition will not adversely affect SLT’s financial
and operational results.
Elsewhere in this report, we have given detailed accounts of
the Company’s strategy and business plan to take it through
the years to come. An “outward looking” approach
towards becoming a premier regional telecom service provider,
a diversification of revenue streams and expansion of our product
and service portfolio, encompassing mobile telephony too, are
some of these initiatives.
Technology
It goes without saying that the global telecommunications industry
has advanced beyond the use of “technology” to the
use of “super technology”.
Likewise, significant technological change is happening at an
extremely rapid pace. Within the spirit of healthy competition,
the introduction of existing rival telecommunications technology
or the development of new technologies could result in the Company’s
own becoming obsolete or subject to heavy competition.
Either scenario poses a risk.
Financial
Currency Fluctuation
Although SLT generates a full 79% of its revenue in Sri Lanka
Rupees, we fully expect that a significant portion of the Company’s
debt will be denominated in foreign currencies. All our network
equipment purchases are effected in foreign currencies.
SLT’s borrowings totalled Rs. 13,949 million for 2004,
of which Rs. 10,470 million was denominated in foreign currencies.
Total debt for 2004 would stand at Rs. 25,370 million (Group)
of which Rs. 15,092 million (Group) would be denominated in
foreign currencies.
Therefore a currency risk exists, in terms of the Company’s
obligations and expenditures denominated in currencies other
than the Sri Lankan Rupee.
Any material devaluation of the Sri Lankan Rupee against foreign
currencies could limit the Company’s ability to make further
network equipment purchases as well as its ability to contract
additional or service existing and future foreign currency denominated
debt obligations.
In turn, this scenario could adversely impact on the Company’s
business, financial and operational health, as well as affect
its prospects.
Capital Investment
SLT’s business is capital intensive. In order to remain
competitive and at the forefront of the industry, the Company
needs to make significant capital infusions. We expect we will
require substantial financing to broaden the existing range
of telecommunications services, develop new services and upgrade
our network using new technologies.
Although SLT plans to fund its future planned capital investments
primarily through cash deposits, cash flows from operations
and debt, including a portion of the proceeds from the International
Bond issue, adequate financing may not be available to the Company
on commercially acceptable terms.
Such a scenario poses risk to the Company’s business prospects.
Labour Relations
SLT has maintained an extremely good relationship with its employees
over the years. The Company has enjoyed industrial peace thus
far.
We have gone through privatisation fairly successfully and the
process has brought many benefits to the worker community through
better working conditions and facilities as well as job realignment,
better training and efforts at improving self worth and personal
development.
Almost the entire executive and non-executive cadre of the Company
is unionised.
In Sri Lanka today, socially sensitive reforms such as labour
reforms, privatisation of state owned utilities and civil service
reforms have attracted protest and opposition from opposing
political factions and trade unions. Thus far, SLT has not been
embroiled in such debate and opposition. However, this remains
a potential area of risk, where any labour unrest and work disruptions
could have an adverse impact on the Company.
Another aspect in terms of the human factor is that, SLT is
heavily reliant on its skill base. The industry, being so greatly
technologically driven means skilled staff are in great demand.
Competition for qualified employees is significant in the market,
and the loss of key personnel or an inability to attract new
skills could have an adverse impact on the Company.
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