Lowering Cell Phone Interconnection Rates in South Africa: public hearings : Day 2

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Communications and Digital Technologies

13 October 2009
Chairperson: Mr I Vadi (ANC)
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Meeting Summary

Day Two of the public hearings commenced with a briefing by the Namibian Communications Commission which highlighted the commonalities of the Namibian experience with South Africa’s mobile termination rates. The regulatory authority in Nambia had intervened to protect consumers from the exorbitant costs associated with interconnection rates.

The Competition Commission stated that they supported an expedient process to arrive at an interim figure. However, any figure that was arrived at arbitrarily could be subject to legal challenge. The Commission also commented that mobile operator profits arising from high call termination charges were not likely to be passed back to consumers
in higher prices for retail services, The Commission recommended that the ideal situation would be to regulate these retail prices directly.

MTN requested that all pricing information required by the Committee be submitted in a confidential session, at which ICASA had to be present. MTN said that they were willing to reduce interconnection rates but had serious concerns about the potential impact of sudden and substantial cuts on the roll-out of MTN investments and their measures that benefited poorer people and communities. MTN disputed the notion that reduced call tariffs would result from a cut in interconnect rates based on an international study of more than 24 countries, which had shown that a 10% cut in interconnect rates was followed by a 10% average rise in retail call rates.

Internet Solutions submitted that this strategic intervention by the Portfolio Committee was a long overdue important step that went to the heart of one of the most significant bottlenecks found in the market. The present mobile termination rates were neither socially nor economically justifiable. Competition was key to the growth of today's telecommunications markets and interconnection was a critical factor for the viability of competition. Anti-competitive behaviour by incumbent operators had retarded competition and a key weapon was to set excessive rates for interconnection. T
he net profit before interest and tax of these companies was 30%, which was unheard of in any other retail sector which made less than 10%.

Mr Kim Coward highlighted the excessive profits drawn by one of the country's leading mobile operators, and the impact on the poor of profiteering through high interconnection charges.

Cell C submitted that SA mobile termination rates were unjustifiably high, leading to high price levels, which damaged the entire economy and affected the poor disproportionately. Cell C suggested that only asymmetry would bring the level of competition needed to get prices down. Cell C was in favour of an immediate move to an all-day MTR of R0.75c for the dominant mobile players and R0.65c for the mobile challengers. The ultimate interconnect regime needed to be determined by ICASA on the basis of true long-run costs.

The Committee was pleased that Cell C had at least managed to suggest a reduced rate for the interconection fees and had been honest about their fear of the implications of a greater cut.

Professor Alison Gilwald and Mr Christopher Stork of Research ICT Africa offered their expertise to the Committee on research conducted in various jurisdictions around the world on the issue of interconection rates. Their findings led them to the conclusion that the cost of efficient termination was unlikely to be more than 25 cents. They also suggested that cost based MTR would increase competition, lower prices, result in more subscribers, wider choice of services, additional economic growth and employment. However, other regulatory interventions would be required to prevent piecemeal intervention and for holistic reforms to be implemented.

Cosatu wholeheartedly supported the initiatives proposed by the Department of Communications and the Portfolio Committee to enquire into and address the exploitative costs of telecommunications in South Africa. Cosatu also commented that the content of the public hearings and the policy direction issued by the Department to ICASA was limited to proposals to impose regulations that lowered the mobile termination rates but did not include airtime costs and other aspects of the pricing structure of all telecommunications services.

The Business Place submitted that small and micro business owners were more dependent than medium and large businesses on affordable telecommunication services. This was because they were frequently not able to afford fixed line services or internet access with a desktop or laptop.

The Electronic Communications Network submitted that they wanted to change the way that cell phone charges were levied in South Africa. They were of the opinion that consumers deserved better value from their operators and believed that the situation could be improved with significant benefits for all phone users.

 

Meeting report

The Chairperson welcomed the delegation from the Namibian Communications Commission (NCC), which was the equivalent of ICASA in Namibia. The NCC had been included in the Committee's programme to share their experiences of how they had dealt with the issue of interconnect charges and perhaps there would be lessons for the Committee.

Namibian Communications Commission
Ms Alisa Amupolo, Strategic Advisor and Transformation Project Manager, NCC, gave a briefing on the Namibian experience. Namibia had been going through a paradigm shift and had made significant strides on the issue of mobile termination rates (MTR). There was a degree of commonality with the South African experience especially on the factors that had led to the regulator's intervention in the mobile termination rate. The NCC had recognised the fact that there had been exorbitant costs, which had been passed to consumer tariffs and high tariffs had been experienced within the market. The NCC had invited experts to benchmark the mobile termination rates to a cost based structure, which involved consultation with different stakeholders and the mobile operators. Namibia had two operators one of which had a significant market share of about 70% and a new entrant in the market that had been struggling to pick up in the market because of the high termination rate charged by the dominant operator. Namibia had also experienced reluctance by mobile operators to reveal information on how they arrived at their costs in determining the MTR. The NCC's technical consultants had, however, deduced the mobile operator costs from an analysis of their annual financial reports from which they were able to determine their cost base and thus the MTR.

Discussion
Ms P De Lille (DA) commented that she was interested to hear that the NCC had used their technical staff to look at the operators' budgets and to analyse their annual reports to determine their costs. She asked if this information could be availed to the Committee.

Ms Amupolo responded that the NCC had a public report, which consolidated their findings and outcomes, which they could circulate to the Committee.

Competition Commission

The Commissioner of the Competition Commission, Mr Shan Ramburuth, submitted that the Commission supported Parliament's efforts to reduce mobile termination fees. The Commission commented that mobile operator profits arising from high call termination charges were not likely to be passed back to consumers due to the highly concentrated nature of the mobile telecommunications sector in South Africa and the likelihood of tacit collusion amongst the dominant operators. It was likely that MTN and Vodacom were dominant in the market for mobile voice telephony services, at least in terms of the Competition Act with market shares of between 35 and 40 per cent (MTN) and 50 per cent (Vodacom). As a result of the mobile operators' market power and the high degree of concentration in the market, it was also likely that profits lost from lower mobile call termination charges as a result of Parliament and ICASA's intervention could be recovered by increases in prices for retail services, such as access prices (minimum monthly charges), lower on-net discounts, and higher prices for sms and data. The Commission recommended that the ideal situation would be to regulate these retail prices directly, given the potential for market forces to deal with them. However, it was imperative that regulatory barriers to entry, particularly in the allocation of radio frequency spectrum, be eliminated for new entrants.

The Commission commented on the process to be followed by ICASA and the operators, stating that they supported an expedient process to arrive at an interim figure. However, they noted that any figure that was arrived at arbitrarily could be subject to challenge. Information available to them suggested that there was costing information available to ICASA in its Code of Conduct (COA)/ Cost Allocation Manual (COM) study which would allow the regulator to arrive at a defensible interim figure. This would allow for a substantial but reasonable once off reduction on the basis of the costing methodology applied in the COA/CAM study. The Commission supported further reductions over the next three years but this also had to be done on a defensible basis. The Commission was in favour of a greater regulatory role for ICASA in the determination of call termination rates, and that ICASA ensured that these rates were set on a defensible basis.

Discussion
Mr N Van Den Berg (DA) asked if it would be possible for ICASA to discuss these matters to get a figure without revealing any of the secret information that mobile operators were reluctant to divulge in public. He was frustrated that there was currently an impasse and perhaps there was a way it could be resolved.

Mr Ramburuth responded that it was possible. The Competition Commission did this all the time and they had proper procedures to process and keep that information confidential. They had not perhaps challenged enough the definition of what constituted confidential information so that a declaration of something as confidential would have to comply with that definition. The regulator had respect for all claims of confidentiality but had the responsibility to challenge those claims.

Ms Morutoa (ANC) asked for a definition of 'defensible rate' and the nature of their engagement with ICASA. She asked if they had discussed issues that affected consumers in terms of the interconnection rates.

Mr Ramburuth responded that they should not be guessing these rates since these were figures that could be gathered by research and one had to be able to justify how they had arrived at a figure. He felt that there was enough information for this to happen at the current time. For instance, the regulator could come up with a figure that was too low for the mobile operators, thus affecting profitability. More importantly, when something like this went to court, the question would be asked how they had come up with such a figure and the method that had been applied.

Mr Ramburuth also responded that the Commission worked with ICASA and the operators but they did not have such a close structured relationship as did the mobile operators. They were a regulator and there was a memorandum of understanding between them that clearly spelt out their terms of reference in terms of ex ante and post facto regulation. ICASA was an ex ante regulator dealing with future behaviour whilst the Commission was an ex post facto regulator dealing with behaviour that had already occurred. One of the difficulties of this relationship had to do with jurisdiction. In practice what often happened was that the two regulators consulted each other over any issues that could affect either of them when there was a case of anti-competitive behaviour.

Ms D Kilian (COPE) referred to the Commission's submission with respect to 'structural problems' and their concern that any rate reduction would not impact positively for the consumer as a result. She referred to an issue involving Cell C's entry into the market. She also referred to the history of collusion in the telecommunications industry.

Ms Kilian also asked a question pertaining to what Mr Ramburuth had raised on what constituted confidential information and asked whether the information withheld by the mobile operators could fall under such a definition.

Mr Ramburuth responded to the question on structural problems stating that in economics, where there was any market that had oligopoly - when a particular market was controlled by a small group - such structures gave rise to the problem referred to here. There was an inherent problem by the very structure of the market, which gave rise to such behaviour. The way to deal with that was to change the structure of the market which is what he had referred to with regard to spectrum and the like, allowing new players to enter the market and challenge the predominant players. When Cell C had arrived, the structure of the market had not required collusion between the players in the market.

Mr Ramburuth responded that the answer was that confidentiality could be invoked by the mobile operators on information pertaining to their cost base, but there was no reason why processes and procedures could be set up so that it could be made available to the regulator or to Parliament.

Adv De Lange (ANC) stated that the Constitution and the processes and rules of Parliament were abundantly clear that Parliament was entitled to ask any information. The way this was done could be different: it could be in a closed session or in an open session. However that was a decision that had to be taken by each Committee of Parliament. There was no such thing as commercially sensitive information that the Committee was not entitled to, that was nonsense. It had to be very clear that people had to get rid of any notion that there was any information out there in the private sector to which Parliament was not entitled. One only had to look at the Constitution where there was a clause which specifically provided for that. That was just the point of clarity that he wanted to make.

Adv De Lange commented that the second issue that he wanted to take a different line on, was for him, the fact that when you had an industry such as the current one where on the previous day, the Committee had asked if there were any agreements between the operators on tariffs and fees, with Telkom, they had ducked and dived on the issue. Yesterday the Committee had been told, and he had been stunned to hear, that that there was an agreement, which had been made soon after they had been granted licences, with the head of Telkom and other mobile operators, where they agreed on tariffs and interconnection fees. To him that was the antithesis of and was a breach of the competition laws. He asked if the Competition Commission was aware that there was such an agreement and why, if they were, was it not being investigated. The mere existence of such an agreement was anti-competition, that people that ran this industry were actually agreeing amongst themselves that this was what they would charge and they would not deviate from it. This was in spite of a new dispensation under a new Constitution and the creation of a Competition Commission after these agreements had been entered into for the first time, and yet they still existed up to this time.

Mr Keith Weeks (Competition Commission) responded that they had a number of running investigations and that they had subpoenaed voluminous information around these agreements. However, in interconnection agreements, for example, there would necessarily be a negotiation around rates and in the past this had not been regulated by the regulator as it should have been. It would have been natural for parties to a bi-lateral negotiation to agree on a price. However, some of the information that had come out yesterday where you had discussions amongst competitors - that did raise concerns and the Commission would be investigating that.

Adv De Lange responded that he did not have a problem with what had happened in 1993. What he had a problem with was what had happened since the creation of the Commission. The issue he was raising related to the continuation of these types of agreements, even the possibility of collusion. He wanted to know, from now on with the competition laws in existence, whether it was not completely anti-competition to sit down and make agreements and to continue to rely on these agreements. The existence of the agreement - was that not anti-competition?

The Chairperson commented that what they heard yesterday was that this agreement was indefinite, meaning that it could never be changed.

Ms De Lille commented on the submission not to regulate the retail prices. She proposed that while they looked at interconnection rates, the regulator would give notice that they should also look into the retail prices. There was nothing that could prevent operators from shifting interconnection charges to retail prices.

Mr Ramburuth responded that they saw this as a potential problem but they felt that opening up the spectrum and getting more players into the market was preferable as opposed to regulating. He asked, how parties would alter the agreement then, if such were the case.

Mr Weeks responded that it depended on the agreement at whatever point in time. They could do a conditional regulation for one year with the condition being costs come down otherwise they would regulate retail prices.

Ms De Lille commented that Cell C was bullied into getting into the same conditions as the major players in the market.

Ms Kilian commented that different types of tariffs could apply for different types of player.

Mr Weeks responded that asymmetrical advantage was something that the regulator could consider introducing.

Ms R Tsebe (ANC) asked if ICASA were given an opportunity to do their work, whether the Competition Commission thought that ICASA had the capacity and skills to do this. She commented that ICASA appeared to put the interests of the operators first at the expense of the interests of the consumers.

Mr Ramburuth responded that they did not how the Committee had arrived at its suggested rate of R.60c and the only point the Competition Commission were making was that one need to be able to defend the suggested rate if it was challenged.

A member asked what they thought about the Electronic Communications Act (ECA) in terms of Chapter 10 and whether amendments were necessary and if so why this had not been discussed with legislators.

Mr Ramburuth responded that they were perhaps not the most qualified people to speak on the ECA. The Competition Commission had many disagreements with the ECA, particularly on the issue of jurisdiction. They wanted concurrent jurisdiction but they had lost on that score in their submissions to Parliament. It was very rules-based legislation and not very outcomes based.

Mr Kholwane commented that there was normally talk of previously disadvantaged people, now there would be previously disadvantaged operators with respect to the agreements. He wanted a strong commitment from the Competition Commission to deal with that issue. Yesterday when Vodacom was here, they could not tell them what was the actual cost, based on confidentiality. The Committee could not be expected to shoot in the dark. He asked the Commission to say what their position was to the Committee's proposal based on R0.40c.

Adv De Lange stated that the problem was that the mobile operators would not differ on a price. There was a place for competition always but one had to be careful not to make competition God, it did not solve every problem. One had to be careful not to be dogmatic about this. This was an industry that was started in 1993 and they had recouped their costs within two years. He gave the analogy of running a fair race. He suggested that they look at the whole structure of pricing in the industry.

Mr Weeks responded that the agreement could not remain evergreen in the context of changing regulations, which affected how those agreements were concluded. In other words the regulations were constantly changing and therefore impacted on the type of agreements that could be made by the mobile operators.

Mr Ramburuth denied that that they were dogmatic, responding to Adv De Lange’s comment that competition should not be a God, and he was aware that market failures existed. He felt that this was why regulations needed to infuse competition in the market.

Mr Ramburuth responded that he could not say what the Committee’s proposal of R0.40c was in relation to the mobile operator’s costs but what he was suggesting was a methodology that would stand up to scrutiny, he wanted to urge that a proper process be followed.

Ms Morutoa said the argument of the Competition Commission submission was that they should assess the true cost base. She asked to what extent there could be collusion in the process.

Mr Ramburuth responded that there were many different methods of working out these costs but people had to declare them.

MTN submission
Mr Karel Pienaar, Managing Director: MTN, hand delivered a letter to the Chairperson requesting that all pricing information required by the Committee be submitted in a confidential session, at which ICASA had to be present. The letter stated that MTN was obliged to protect its proprietary and confidential information and they had been advised that it would be inappropriate for them to disclose it in a public forum.

Mr Pienaar submitted that MTN was willing to reduce interconnection rates but had serious concerns about the potential impact of sudden and substantial cuts on the roll-out of MTN investments, and measures that benefited poorer people and communities. He indicated that MTN had invested more on infrastructure in the past three years than the profits earned in that period. The mobile industry had created hundreds of thousands of jobs, promoted social development and boosted the economy. He argued further that the current interconnection rate had provided the revenue that had enabled mobile operators to meet government’s developmental objectives. This included bringing mobile access to remote rural areas, enabling poor communities and individuals to connect at minimal cost, and provide broadband services that were helping to bridge the digital divide.

Mr Pienaar disputed the notion that reduced call tariffs would result from a cut in interconnect rates based on an international study of more than 24 countries, which had shown that a 10% cut in interconnect rates was followed by a 10% average rise in retail call rates. He submitted that that interconnect fees and call tariffs were two of MTN’s principal revenue streams, together with sms and data revenue. If a cut in one source of revenue was followed by a cut in a second revenue stream, there would be a double impact on revenue. MTN was willing to reduce interconnect rates, but this had to be done gradually over a period of time to avoid “business model shock”.

Mr Pienaar disputed claims that South African cell phone call rates were among the highest in the world and stated that mobile tariffs had gone down steadily in real terms over a period of 10 years. He specifically disputed figures in a study used by the Department of Communications in its criticism of South African mobile operators. The study had used wrong or outdated information that painted an untrue picture of mobile tariffs. The Department had stated that South Africa had some of the highest data prices in the world. In reality, MTN’s data price of 19c a megabyte was among the cheapest in the world, and MTN data prices were 40 times cheaper than Chile, which the Department had said was cheaper than South Africa.

Mr Pienaar disputed claims that prepaid tariffs used by poor people were higher than contract prices, by showing that average prepaid tariffs were cheaper than average contract rates. He submitted that in addition to fair and innovative pricing, enabling calls at extremely low rates, South Africa had one of the lowest costs of mobile ownership in the world. People could get connected and stay connected for very little – 49 cents for a SIM card and one call every 90 days.
This low cost of ownership, plus the rapid expansion of mobile networks, had given South Africa a mobile penetration rate – the percentage of the population with a mobile connection – of 104%. India, had a penetration of only 37%, concentrated in the cities while South Africa's networks reach 98% of the population.

Mobile take-up in countries like India had initially been very slow. Rural coverage and affordable access for the poor in South Africa had been funded by interconnect. Interconnect was a driver of South Africa’s world-class mobile coverage and the very high percentage of our population who were connected. If prices were too high, as critics claimed, the market would have shrunk. The continual growth of the mobile industry showed the criticism was wrong. MTN SA had invested R27 billion in infrastructure development since 1994. Over the past three years alone the company had invested R15 billion in South Africa, more than the total profits of its South African operations.

Discussion
Adv De Lange asked whether they understood what it was that the Committee wanted for them to deal with, stating that the Committee had called the operators to come and explain to the Committee about their cost base structure.

Mr Pienaar responded that they would respond to this issue, which is why MTN had requested for the matter to be heard behind closed doors to enable them to furnish the Committee with the information on their cost base structure.

Adv De Lange asked Mr Pienaar whether he was in agreement that for the Committee to be able to make an informed decision they would require that information on the nature of their costs.

Mr Pienaar responded that this conversation was long overdue and hence the letter to the Chairperson.

Adv De Lange asked further if MTN agreed that it was in the definition of their model, that clearly if they had a business model with a lot of fat in it, such as sponsorship deals for cricket, that this contributed to high interconnection rates.

Mr Pienaar agreed.

Adv De Lange commented that they were talking in the dark and past each other. He asked if there were any agreements to fix costs, tariffs and interconnection rates that MTN was aware of, and he cautioned Mr Pienaar to be mindful of the legal consequences of his response.

Mr Pienaar responded that there were no agreements. Mobile operators had to have agreements on interconnection. Interconnect principles were written down and every part of the negotiation was overseen. The main agreement they had was on collaboration over site sharing and it was the only real one, pertaining to how they shared infrastructure. Interconnection agreements had been overseen by independent assessors from Australia based on their expertise in the field.

Adv De Lange noted that since they had now established the Competition Commission and ICASA, why then it was important for the industry to have exactly the same tariff. What would be the rationale of doing that?

Mr Pienaar responded that the critical thing was cost base, people had different costs. There could be price arbitrage or price arbitrage potential. This was the biggest worry. These things they needed to deal with, price differentials and how people calculated their costs. The main issue, however, was about arbitrage. Quality would suffer as result of a vacuum created in pricing and this would significantly lower the standard of telecommunications in the country.

Ms Kilian wanted to ask about the agreement reached in 1999. She asked what the mobile operators would argue informed interconnect costs.

Mr Pienaar responded that the biggest cost was that they had built this huge investment. The bigger part was the infrastructure and what they invested to support and maintain it.

Ms Kilian was concerned that they were robbing Peter to pay Paul. South Africans had a right to know what percentage they contribute to MTN's expansion through their use of the mobile operator's products.

Ms Mazibuko (DA) asked why interconnection revenue was a very important to the mobile operators and why it was being turned into a revenue stream. Why was MTN's cash flow dependent on this thing, interconnection, and why were they comfortable relying on interconnect which was an insignificant part of their business as it was only meant to facilitate communication across networks and not generate revenue?

Mr Pienaar agreed with her and proceeded to explain the way through which interconnect generated revenue for MTN.

Mr Kholwane commented that this submission was not contributing to the multi-party process and they could be a stumbling block in terms of their input.

Mr Kholwane asked what time MTN needed, what figures they had to propose. MTN had to distinguish investment and profit-making to avoid being one sided in their presentation. He agreed with Ms Mazibuko and asked what was the purpose of interconnecting, and if it was where they had to make their profit.

Mr Van Den Berg (DA) commented that he was not so sure that lowering interconnect rates would favour the poor people of South Africa. From the outset it had been clear that more people had to be in the position of connectivity and that had been the impetus behind the whole process. There was an old saying that if you lost on the swings, you made up on the merry go round. Looking at a newspaper, there were three sources of income, namely, advertising, the cover price and the subscription fee. If Die Burger lowered their advertising prices, then what would happen was that the cover price of the newspaper would go up. For instance, if the Department of Energy lowered the price of petrol, it did not necessarily mean that more poor people would be able to afford cars because they simply would not have the money. If a lot of the income for interconnection fees was lost because of the reduction of the interconnection charges then it had to be obtained from somewhere else. He wanted to predict that the SIM card costs would rise as would the handsets. This whole process, therefore, would not benefit the poor people of South Africa.

Mr Pienaar responded that he agreed with Mr Van Den Berg about if Parliament intervened to change the interconnection rate

Mr Kholwane said that the Committee was merely asking for justification for the cost base which mobile operators relied on to arrive at the figure of R1.25

The Director General of the Department of Communications,
Ms Mamodupi Mohlala, clarified that the data used in the pricing study, which MTN had stated was not correct, had in fact been obtained from MTN and web pages could be provided to the Committee of MTN's website where this information had been retrieved.

Internet Solutions submission
Internet Solutions, represented by My Siyabonga Madyibi, (Director of Regulatory Affairs) and Greg Payne (Chief Operations Officer) and Brian Pinnock (Manager: New Product Development), submitted that this strategic intervention by the Portfolio Committee was a long overdue important step that went to the heart of one of the most significant bottlenecks found in the market. The present mobile termination rates were neither socially nor economically justifiable.

Competition was key to the growth of today's telecommunications markets and interconnection was a critical factor for the viability of competition. Anti-competitive behaviour by incumbent operators had retarded or prevented competition in the telecommunications market and a key weapon deployed in this regard by incumbent operators, was to charge or to set excessive rates for interconnection.

A balanced and economically justifiable interconnection rates regime was therefore a critical factor for the viability of competition. They strongly supported the proposal by the Portfolio Committee that mobile and telecommunications operators drop the interconnection rates with effect from 1 November 2009 to 60 cents per minute or even lower during peak times.

Internet Solutions argued that the reduction of the MTR to 60 cents per minute was viable for the mobile network operators as it was not significantly lower than the net income, which they received for the bulk of their minutes currently.
 
Discussion
Ms L Mazibuko (DA) commented that she was worried that they were creating a moral hierarchy, where they were saying that the mobile operators were making loads and loads of money and they had to cut the interconnection rates, and as had been said earlier they had to take the hit and they would survive as there would be some profits but not as much as prior to the cut.

She wondered at the fact that mobile operators had been making so much money from interconnection and this was an almost perverse consequence of the high price. She was concerned that they were not having this debate in terms of it being a win-win situation because she did not want to create the impression that the Committee was coming out guns blazing to punish mobile operators, who had responsibilities to shareholders, many of whom were pension funds and trade unions. What they had to focus on was the long term benefits of increased revenues as result of a larger subscriber base instead of focusing on the small issue of the interconnect rate. She asked how long they thought it could take before the hit taken by mobile operators would translate into even better rewards and an actual win-win situation.

Mr Payne responded that the reality was that even after investment, the net profit before interest and tax was 30%, which was unheard of in any other retail sector. Any other retailer made less than 10% when it came down to the bottom line. The reality was that the mobile retailer would need to amend their paradigm to expect that their profit margins in a competitive retail environment would no longer be 30%. He did not think that there was a win-win that entailed them maintaining 30% earnings, it was just not practical. Some of those earnings now needed to be returned to the consumer.

Mr Kholwane noted that based on what had been said, there was an indication that the big operators seemed to be unfair to Cell C. He asked whether it was factual that in business one could take a knock in the short run but not in the long run. What would that mean for the mobile operators and was it not the case that big operators lacked innovation to find ways to reduce tariffs? He asked if Internet Solutions were simply making noise about the interconnection rates and not making any investment in terms of infrastructure.

Mr Payne replied that the big operators were battling to trade off their existing investments with the requirement to be a bit more nimble in a de-regulated industry. The culture of innovation meant that they had this major infrastructure cost outlay that they needed to recover and this was what their business plans were dependent on. There were very real economic concerns, therefore, and telecommunications was not a low cost business that could be done without significant investment.

Mr Payne said their contribution to investment in infrastructure was just a question of timing. If they had been supported by an industry structure that allowed them to compete reasonably then on an incremental basis they could have been able to make such investments. However in the current economic climate, they would not be able to throw huge sums of money into infrastructure development. The good thing about the industry was that they did not have to invest in the same technology, that had cost the incumbent operators billions and billions of rand, to offer equivalent services. For instance, there were other media that could carry a mobile call, which did not rely on a GSM network. For example, 35% of mobile calls in the United States originated in a building and if one looked at the wide spread coverage of Wi Fi it was not particularly difficult to assume that calls would soon be made on this platform for 75% of the traffic and bypass the GSM network entirely. If pro-competitive regulation was introduced then there could be ways that they could compete, which had not existed in the past. It was more difficult for the incumbent operators to change their course.

Mr Madyibi said that they had heard that the interconnection rate had to be kept high because it would benefit Cell C. However he had been in couple of meetings where Cell C had been present as well and they had unequivocally stated that they wanted the interconnection rates to go down. It was therefore confusing to hear the contrary view, which raised the question who was telling the truth? Internet Solutions did not believe that there was any truth to that claim and he thought, if anything, that Cell C was looking at the bigger picture and interconnection rates could not continue to be used as a source of revenue. If the rates went down, then other opportunities would come up in the market.

Mr Kim Coward's submission
Mr Kim Coward submitted that it was with disdain that he had seen a "Christmas party" given to employees of a cell phone network provider that cost R30million to host 7000 staff (Vodacom) This had made him perceive that there was an extravagance of profiteering. Yes they had shareholders to keep happy, but the golden goose had been laying eggs for a long while.

India had some of the cheapest rates such that it was cheaper for him to phone via Indian cell to an SA landline than a cell to cell in SA. There were still more providers wanting to get in on the act in India. Furthermore India was larger than South Africa and they still managed to make a profit and put in new infrastructure. So why could the networks in SA not do the same and everyone win but not with exorbitant profits averaging pre-tax profit of R17 billion at the expense of most in SA. It was a captive market so there was no possibility of a network being wiped off the map.

The cell phone network providers were making the poor poorer even when they supplied community phones at rates 100 times that of India, albeit at a minimum of 43% less than normal rates. It saddened him that a single sourced telecommunications giant like Telkom had to spend on advertising, yet lay off workers and charge exorbitant rates for connection fees to a landline from a network provider. Telkom was too big for anyone to take to the competition board as they had so big a might with the profits they made - and yet they did not put in infrastructure in a lot of rural areas where the poorest of the poor, who relied on cell phone coverage at exorbitant rates. This in turn made them even poorer. He noted Pay As You Go is typically 100% to 40% more than contract rates which most of the poor use (and not community phones).

As a communications engineer in military communications he had the ability to identify what operation installation and maintenance costs were. So with the aforesaid in mind, he supported a full disclosure audit on all network providers to prove their cost and profit over the past five years, including the cost of local new infrastructure and maintenance. Most were putting infrastructure in the rest of Africa to the tune of typically R28 billion capital expenditure. This was an eye-opener as to the profit margins. Typically at present the pre-tax profit was 50% of the operating revenue. “We are all in a capitalist society and profit was the name of the game but not to pull the poor down further into the dirt”. Also they needed to disclose shares held by government and foreign organisations such as pension funds so there was no collusion and ulterior motives or pressure brought to bear on disclosure.

He believed that ICASA was not independent enough nor qualified enough to do such an audit, as this organisation had had many years to sort out cell phone charges. His suggestion was to have a forensic auditor backed by foreign technical experts possibly from India or Namibia who had knowledge of cheaper infrastructure. This would ensure impartiality of the whole process. Profit margins would not be affected if interconnection fees were dropped as there would be more usage available to all including the poor, as was the case in India.

Further, with the entrance of Cell C in 2001 and Virgin into the market the connection fees between providers (R1.20 and Telkom R1.01) had steadily increased to push out these two providers. It needed to be checked by the Competition Commission as to when these increases of many hundred percent over the years had taken place to see if there was collusion by the major stakeholders including Telkom.

Discussion
Mr Vadi asked Mr Coward what he thought the cost was.

Mr Coward responded that it depended on throughput. In his estimation, the cost was between 50c and 60c.

Ms Kilian asked what the actual cost was once one had acquired equipment.

Mr Coward did not give an exact figure but proffered the opinion that on the basis of his military engineering experience and knowledge, there would be a need to continually develop infrastructure to keep abreast with technological developments to maintain the high standard of the country's telecommunications. Existing infrastructure, however, had a longevity which provided sufficient time for ploughing back investments and generating healthy profits.

Cell C submission
Cell C Chief Executive Office, Mr Lars Reichelt, submitted that SA mobile termination rates were unjustifiably high, leading to high price levels. High price levels damaged the entire economy and the poor disproportionately. Only asymmetry would bring the level of competition needed to get prices down. Cell C was in favour of an immediate move to an all-day MTR of ZAR 0.75 for the dominant mobile players and ZAR 0.65 for the mobile challengers. The ultimate interconnect regime needed to be determined by ICASA on the basis of true long-run costs.

Discussion
Mr Kholwane appreciated that Cell C had done what the Committee had asked them to do. Cell C were part of a consortium. He wanted to know what the attitude was of the other players out there. He asked why they were motivating and what informed them to push for a flat rate that did not distinguish between peak and off-peak. He also wanted to know when they thought that their suggested rate of R0.75c should be implemented.

Ms Mazibuko and other members also expressed their concerns about the cost methodology applied by the mobile operators and requested clarity on that.

Mr Reichelt replied that he could not speak on behalf of the other players. With respect to Cell C, there had been incredible debates with their shareholders which had not been an easy process for them, and their proposed R.75c it was very well researched. It was also very painful to them as the least profitable network. There was that thing called elasticity, which was not predictable, in terms of exact figures and this affected their business planning.

In terms of when the new rate could start they had to be careful that they were not over taxing the networks. They had to be sure that they had capacity. They would rather see it done at the beginning of the New Year.

Ms Kilian asked whether there was any particular reason why the Chapter 10 and the COA process was taking so long. She also asked if this would not affect Cell C's infrastructure roll out and whether they foresaw that they would not need to reduce their call rates.

Mr Reichelt responded that on COA/CEM it was a very complex process that went to the entire cost structure of the company.

Mr Reichelt also responded that this was going to hurt them because they were only partly funded by their customers with the greater part of their funding coming from their shareholders.

Mr K Zondi (IFP) commended Cell C's honesty. He asked whether they were making this enlightened proposal because they were piggy backing on other network. If they had been in their shoes, would they have made a similar proposal, asked.

Mr Reichelt responded that they were doing it for two main reasons. Firstly, they believed that it was a structural impediment to competition in the market. Secondly, they were net beneficiaries which put them in an unusual position.

In terms of putting his feet in their shoes, he replied that he had bigger feet. Theirs was a measured approach to a tricky problem and he would not make any promises. There were a lot of things that were structurally wrong in the market, which he felt would be address by the reduction of the interconnection rate.

Mr Reichelt also responded that they were trying to make a proposal to the industry which was equitable which provided stability and solved an immediate problem. The frameworks which they had were intelligent and should be observed.

COSATU submission
Ms Prakashnee Govender, Parliamentary Liaison Officer, said that Cosatu wholeheartedly supported the initiatives proposed by the Department of Communications (DOC) and the Portfolio Committee to enquire into and address the exploitative costs of telecommunications in South Africa. Cosatu felt that the content of the public hearings and the policy direction issued by the DOC to ICASA were limited to proposals to impose regulations that lowered the mobile termination rates but should include airtime costs and other aspects of the pricing structure of all telecommunications services.

Discussion
Mr Kholwane asked what their view was of Cell C's submission.

Ms Govender responded that they would not support the softening of the Committee's proposal by Cell C to a rate of R0.75c.

Ms de Lille commented that she did not think it was correct that the hearings were of a limited scope.

Ms Govender responded that they would want to see what the Committee had in mind and respond to that. However there was a need for a holistic review of serious issues such as the privatisation of Telkom.

Ms Kilian commented that she was concerned about what seemed to be a very ideologically based presentation.

Research ICT Africa submission
Professor Alison Gilwald and Dr Christopher Stork submitted research and statistics to the Committee which debunked the major arguments raised by the incumbent mobile operators, against the reduction of interconnection charges and mobile termination rates.

They submitted that in line with global sector reforms, policy and institutional arrangements had been established in acknowledgement of the difficulty of creating competitive markets in
infrastructure industries such as telecommunications. Specialised agencies had been set up specifically to deal with the complex and dynamic nature of the industry and their critical role of creating an environment conducive to investment, supporting macro economic objectives and serving the consumer welfare which were often in tension with each other.

In alignment with the reform process, these agencies had been given carefully determined powers to constrain the pursuits of excessive profit resulting from the market structure but in ways that would be accountable to ensure fairness and avoid capricious behaviour by the regulator. In this particular area under review the law required that the rates be regulated through a process that sought to make transparent to the regulator, prices of the operator to ensure that they were cost based and in line with the prices of other operators and international benchmarking.

Parliament’s highlighting of this regulatory bottleneck was welcomed, not least of all for bringing some historically opaque regulatory issues into the public domain. But what this had also done was that it confirmed the complexity of the process and historical difficulties of information asymmetries that plagued regulation of infrastructure industries.

High interconnection termination rates while critical structural impediments in the mobile
market, were only one of the many indicators of the market structure and ineffective regulation.

Discussion
Ms Tsebe commented that this was a well balanced presentation and it had also provided valuable opinion. What was lacking was an opinion on the Committee's proposal of R0.60c.

Dr Stork responded that the proposal was very reasonable in line with Kenya and other countries in Africa. The suggested glide paths gave operators time to adjust their business plans. Other problems need to be addressed, however, to dispense with the regularity and need for similar last-ditch interventions.

Ms Mazibuko asked about confidential and market sensitive information. If pricing structures were transparent, then what would be the ramifications of that information being known?

Mr Stork responded that their study had relied on information from an analysis of the annual reports and budgets of the mobile operators and that they had provided sufficient information to give an indication of what their costs entailed.

Mr Kholwane commented that the view from the operators was that if one dare touch interconnection, negative things would happen that would affect especially the poor.

Mr Stork responded that generally speaking, dominant operators had the same arguments but one would find that it did not happen that way in practice. There would be more usage and more subscribers which would increase revenues at minimal call rates.

Professor Alison Gillwald responded that studies had been done in other countries to show correlation between interconnection and retail prices. The studies cited by the mobile operators had problematic methodology, which led to questionable findings that were unreliable.

Mr Kholwane commented that the argument of the mobile operator always shifted depending on context.

Mr Stork responded that the mobile operators would always make the case that maximised their profits.

The Business Place submission
Mr Martin Feinstein, Managing Director: The Business Place (a small, medium and micro enterprise (SMME) development service in Southern Africa) submitted that small and micro business owners were more dependent than medium and large businesses on affordable telecommunications services. This was because they were frequently not able to afford fixed line services or internet access with a desktop or laptop. These small and micro enterprises frequently did not have fixed rented or owned offices, and therefore need mobile communication technology to communicate with customers and suppliers as they mostly operated from home.

The current expenditure of these small and micro-businesses on cell phone services was costly and was draining the working capital of these businesses. The cell phone was their lifeline, and if they exceeded their monthly budget for cell phone services, these businesses could be cut off from customers and suppliers with devastating effect. It was critical that cell phone calls and interconnection costs be reduced by a minimum of 50% in order to ensure that the thousands of small business owners in South Africa were able to have affordable communication to run their business.

Discussion
Ms de Lille referred to the spaza shops adding huge mark-ups to the cost of airtime, and asked if there was any intervention that they could suggest.

Mr Feinsten responded that he did not really have an answer but he guessed that it was driven by the wholesale price of mobile rates. If it was reduced, then those retailers would reduce the retail cost. What the relationship was in reducing one part of the tariffs on another part, was a tricky matter that he could not really speculate about.

Ms Kilian asked from his analysis if there was any idea of the split in terms of contract and prepaid customers in the small business sector.

Mr Feinstein responded that the split was 70% prepaid to 30% contract, who were at risk of being black listed if they defaulted on their phone bills. Around only 20% of businesses had landlines and most of them did not have an infrastructure where they could have an office phone.

Mr Kholwane commented that earlier on in the hearings, there had been a comment that part of the unintended consequence of lowering the interconnection rate would be a rise in retail costs.

Mr Feinstein responded that the answer to that was related to margin and volume and he expected that a higher volume of subscribers would attract a healthy margin of profit that would be viable for the mobile operators.

Electronic Communications Network (ECN) submission
Mr John Holdsworth, Chief Executive Officer, and Mr Jeremy Macdonald, Director of Business Development, submitted that ECN wanted to change the way that cell phone charges were levied in South Africa. They were of the opinion that consumers deserved better value from their operators and believed that the situation could be improved with significant benefits for all phone users. High mobile interconnection rates meant everyone paid too much for their phone calls and prevented new entrants like ECN from launching truly innovative services.

The high interconnection rates imposed by the incumbent mobile operators had effectively closed their networks to competition. High interconnection rates made it harder for new entrants to compete with the large incumbent operators. The effect of this was that the new entrant ended up having to subsidise the profits of the incumbent operators just to enter the market. They appealed to the Committee to include changes to other costs such as roaming. This would allow valuable services to be delivered to consumers at an affordable cost.

Discussion
Ms Kilian asked about the COA/CAM regulations in terms of the services that could charged for by mobile operators.

Mr Macdonald responded that what had been clearly said by MTN today was that they were cross subsiding their charges with interconnect revenue. This money could not be used to fund base stations and the roll out of infrastructure and had to be priced to cost according to COA/CAM regulations. He submitted that the existing COA/CAM regulations stipulated that interconnect had to be cost based. It was on record before Parliament that the current interconnect rates were not justifiable based on the current COA/CAM regulations.

[PMG was not present for the final two submissions by Multinet Wireless and VOX Telecom.]

 

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