Profits and investment

Posted on February 11, 2011  /  1 Comments

In most countries in the early stages of liberalization, I get asked about the profits operators make and how they should be monitored. I tend to say that the priority should be on monitoring investments (not committed, but actually made) and that it’s not a bad idea for the regulator to have some knowledge about profits. The reason I give priority to investment is because that is what drives performance. If investment declines, the regulator can expect problems. Profits are relevant for two reasons: first, if they are below the norm (more on this below), investments will most likely be affected negatively. If they are well above the norm, it is an indicator that the market is short of competition.

This above/below the norm assessment is a tough one for the regulator to do on a regular basis. One should not draw conclusions directly from the raw number. While the LKR 1.275 billion profit made by Dialog Axiata does seem like a large amount of money, it must be first seen in relation to the size of its capitalization (Dialog was a one point the largest in the Colombo Stock Exchange), and then in relation to the returns on investment in similar companies. The former is quite simple; but the latter requires a bit of specialized knowledge, not normally available with regulatory agencies and government ministries.

Anyway, the profit picture seems okay on the surface, because Sri Lanka’s largest mobile operator is investing again.

Sri Lanka’s Dialog Axiata, the islands largest mobile operator said it will invest 150 million US dollars in expansion bringing the total foreign direct investments by the firm to 1.2 billion US dollars.

Dialog Axiata chief Hans Wijayasuriya said the new investments in part will to go strengthen its broadband and fiber optics network coverage.

“We will focus a lot of it in broadband, mobile broadband as well as fiber optics,” Wijayasuriya said.

“We want to make our products available seamlessly across the country.”

The firm started in 1994 and now has 7 million subscribers in a market which had over 15 million subscribers.

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