Cost of communication in South Africa: Vodacom & MTN submissions

Meeting report

Opening remarks
The Chairperson noted the absence of the chairperson of ICASA, who had to return to Johannesburg. He welcomed the stakeholders and handed over to Vodacom to kick-start the proceedings.

Vodacom presentation
Mr Shameel Joosub, Vodacom CEO, said he was pleased about the opportunity to present how pricing was determined in the mobile phone industry, and clarify how promotions worked. Prepaid rates had since 2008 declined by 44% and blended rates by 30%. Vodacom had recently published its results, and indicated that the average rate per minute had dropped to R1 per minute, from R1.53c in 2008. The reason why the blended rate or contract was still high was because of subsidies and they had gone up incredibly recently by between 30 to 40% increase. Vodacom offered contracts either with or without devices (SIM-only) so customers had a choice to take a phone or not, and the rates were very different.

Vodacom offered a wide range of prepaid price plans to meet customer needs and market demand. Call discounts were determined by traffic utilisation profiles per site: 26 million of the Vodacom customer base was on Vodacom 4 Less where depending on the time of day, prices could be reduced by up to 100%. The effective rate paid was actually 79c. There was a big difference between published and effective rates. There were also prepaid daily rates, and airtime advances where one could pay on the next airtime recharge. These were standard products, but on top of them there were aggressive promotional products that were driven by competition. These also created a differential point between operators. About four million customers used the Night Shift free calls. This applied when one had bought a R12 airtime voucher, and this promotion had been going on for four years. Promotions drove the effective call rate, and gave people a lot more value.

Promotions had a great effect on the market. These were ideal and needed to be submitted to the Regulator so it could monitor the minutes used in the market. In SA people had to be reminded that if the promotion was running, that was the price. The prices that Vodacom had been selling data rates - both standard and promotional - had become the tariff. Everybody was on the promotional prices.

Mr Joosub said there was a need to simplify pricing. Vodacom had always ensured the best competitive value to the customer, and was delivering on that more than any other operator. Some of the competitors' promotions had not been successful because of Vodacom's fierceness in competition. When one bought a particular tariff, one got minutes included in the package; in addition to that there was a high level of subsidy for the device. The device subsidy varied between R600 and R7 000.

Over the years SA had been a market which allowed a lot of bundling. Customers were allowed choice. The strategy by retail shops to sell cellphones on promotions with other items in their shops had kept the minute cost extremely high. The items were valued at the cost of the cell phone. This pushed the value of the subsidy higher than compared to a country like Spain.

Most South Africans bought a contract based on the phone; fancy phones were still preferred. This was how the market operated.

Broadband demand in SA, as was the case in other economies, was fuelled by smartphones and tablets. Opportunity for expanding broadband penetration via smartphones was huge in SA, but spectrum was a constraint. Data explosion had led to an effective price decline of data rates per megabyte. Wholesale regulation and competitive market dynamics served consumer welfare.

In the near future Vodacom would be coming up with a whole new set of tariff plans. This would take the company from a voice-centric world to a more data-centric world. There was a need for new packages of data, as it was commonly used. The new pricing would give customers options to either have a cellphone or not, and handset financing would be allowed for those who chose not to have a device.

There was a bigger uptake of smartphones and this was pushing up the level of subsidies. To date there were 5.3 million cellphones live on the networks, with an average customer increasingly spending on data. Tablets were growing as well as the data usage per customer. SA was still in its infancy in terms of data penetration, due to the lack of fixed line penetration in the country. Penetration via smartphones needed to be driven significantly. Mobile had become the primary access to the internet for more than 20 million South Africans. This figure included all other operators.

While trying to promote data usage, Vodacom had tried to push down the cost of data devices. Through Vodafone procurement the company had been able to get phones in at around R700. Vodacom would continually try and bring down the cost of a smartphone so that penetration was expedited in order to bridge the digital divide.

Retail prices were declining and would continue to go down due to effective competition in the market. Mobile Termination Rates (MTR) had played a role, but was not the sole mechanism. Fierce competition had played a bigger role in bringing down prices. Price did not determine a success or failure of an operator; there were many more factors that determined purchase patterns of customers. These factors gave an indication as to what operators could improve on.

Vodacom led in the promoter share and that drove the market share. The industry needed to look at reasons why competition in the country was not growing; although fierce, the country needed better-funded operators. The 350 licensed operators were too much and one should be looking at consolidation so that there was more money to be channelled into investments.

Vodacom invested R7 billion a year in the network to keep its advantage and ensure it delivered on its objective to democratise telecommunications. A great deal of the population was covered in the 3G services but the intention was to have all South Africans covered.

Mr Joosub said the glide path had worked for SA, and the Regulator needed to make a determination on whether it was still needed. It had to be as a result of a well-designed process. He said the sentiment that there was no impact due to MTR reductions was untrue. Vodacom had taken actions to mitigate the effects of this. MTR policy makers should be circumspect about MTR reductions due to:
▪ rural coverage was a concern and investment resources were still required;
▪ MTR revenues helped facilitate low cost access to communication;
▪ the waterbed effect [which predicts that a reduction in MTRs will reduce the profitability of attracting additional mobile customers to an operator’s network, and as a result competition in the retail sector will weaken, mobile retail rates will rise and market penetration growth can be expected to slow];
▪ regulatory intervention was ICASA’s responsibility.

When one considered the impact of MTR, one ought to consider its effect on rural coverage as well. Rural sites work because of the income received from the MTR. It was important to consider what level of investment was needed. The last MTR drop - about 28% reduction in mobile connections - was due in March. This required industry players to go back and think how that would be accommodated. There would be an effect.

It was important for the industry and government to work together in order to deliver on the National Development Plan (NDP) and Vision 2020. Vodacom supported and would work with government to achieve these policy objectives. It was possible for every household to have broadband. It was important that this operated at speeds that were four times faster as they led in the new technologies. Vodacom, MTN and Neotel were rolling out wireless connection to improve connection. There were a number of things that could be done to bring costs down and ensure that Vision 2020 was delivered.

He said the national communications plan, as devised by Government was world class. Electronic Communications Policy considerations should:
▪ include both incumbents and emerging telecoms operators;
▪ facilitate spectrum sharing and trading;
▪ promote network and facilities sharing;
▪ streamline rights of way processes;
▪ encourage co-investment; and
▪ consider the option of mobile virtual network operator (MVNOs).

MTN presentation
Mr Karel Pienaar, MTN CEO, said a study was commissioned, on request of the Director General, on benchmarking retail prices in South Africa. It was found from January 2009 the effective rates had come down drastically. The effective rate was what customers paid on average; this was arrived at by dividing the total minutes with the total revenue. There were about 15 million customers on MTN Zone, and they had experienced price decreases of up to 40%.

The benchmarking study was done by a United Kingdom company that specialised in benchmarking. One of the key aspects of the study was the peer group review, and when benchmarking one had to compare to equal countries in the world. More studies of this nature were needed because this was the only basis to establish how SA compared to the rest of the world.

The study started out with 151 countries but ended up focusing on ten countries (Algeria, Egypt, Morocco, Poland, Turkey, Mexico, Saudi Arabia, Columbia, Peru, and Venezuela). It looked at four indicators under socio-economic - area, urban population, Gross Domestic Produce, and purchasing power parity - and Information Communication Technology (ICT) - penetration rate, base stations, share of technology, and earnings before interest, taxes, depreciation, and amortization (EBITDA) margin. It was interesting that the company used real data from the operators.

The retail price decreases were brought about by competition in the market. The reduction in MTR focussed the operators’ minds, and a lot of revenue was lost when it happened. This year about a billion rands would be lost. The operators were lucky that data and smartphones happened; this rejuvenated revenues for operators.

Reduced MTR forced MTN to be more aggressive and focussed in order to gain market share. The MTN Zone got the company a market share and helped it survive the impact of reduced MTR. Data had gone down in prices by about 60% since January 2012, and customers were the beneficiaries. About half of MTN's 25 million customers used data. Most people depended on smartphones to connect to the internet – this was the infrastructure that would deliver.

Mr Pienaar said the poor were the beneficiaries of price reductions in SA. MTN did well for the people of SA when it came to pricing. The findings of the study were very good and needed to be looked at. The findings were different to the picture painted by the International Telecommunications Union (ITU), but it appeared that the numbers submitted to the ITU were not the true prices that customers paid. The correct information was now provided via the Department of Communication (DoC) and Independent Communications Authority of SA (ICASA)

Another thing that drove the full value proposition to the customer was competition, and it was not just about the local companies. Local operators were competing on a global scale; to survive in this market one had to be a company that could scale globally.

He disputed the finding that SA was not the lowest country in mobile price per minute in the world; SA was one of the lowest. The operators provided an affordable service to LSM (Living Standards Measure) 1-4 where the majority of mobile subscriber base was located. Prices were falling and this trend would continue. Devices were a key component and were becoming cheaper; some operators invested a lot on them.

MTN would spend about R5.5 billion this year on investment on infrastructure, and the figure would be bigger next year. This would encompass improving rural infrastructure. MTN spent billions of rands in subsidising handsets and SIM-cards. Affordability was not an issue especially at the bottom segment of the market. In the past four years, MTN had returned the investment to the ground for the preparation of Vision 2020.

MTN would love to see more spectrum; scarcity of spectrum meant one could not drop prices further. Spectrum was about deploying it to all the population in the country. Those who delivered on spectrum needed to be awarded access to spectrum; MTN was in need of more spectrum. This was a critical element of how the future could be unlocked.

Mr Pienaar commented that competition had driven market prices down. He would recommend that market forces be allowed to continue to drive pricing down without interference. The reality was that even if the Committee, DoC, or ICASA did nothing, the downward trend of prices would still continue.

There had been a lot of talk about asymmetries on interconnection. He explained asymmetry as taking money from efficient operators and subsidising emerging operators so they could compete against the efficient ones. In some countries this process happened for a while and then stopped. Once done for too long, this process rewarded an inefficient operator and in the end, the customer would not benefit.

He said the big challenge for SA was data; massive capital investment was needed, and in the next seven years operators would have to put R200 billion on the ground to deliver. He requested that the Committee not focus on "old things" but new thing like broadband.

Discussion
The Chairperson commented that this was the beginning of the hearing process as the Committee next year would engage communities, non-governmental organisations, and all those affected by the price for mobile connection. After the Committee had finished that round, it would come to its determination. This was not a minor process.

The Chairperson said it was confusing that all presenters spoke about international benchmarking and yet presented on a regional scale. When speakers spoke about international benchmarking they did not refer to countries; and yet when they addressed pointed matters they were specific about countries. Whatever comparison was made needed to be among the ten countries that SA was benchmarked with. International benchmarking was a problem if used loosely; the countries benchmarked should be stuck with.

The Chairperson noted the claim by MTN that the market itself would drive down the price, and that the Committee need not interfere. But the market had failed to reduce the MTR before Parliament intervened. What would be different now? When President Thabo Mbeki raised the issue of prices, no one responded. The industry had commanded all the attention, and was therefore now viewed with scepticism. The industry killed the trust Members had in it.

The danger of strained relations of trust between legislators and the industry was that in future industry players would come with genuine legislative proposals, but those would be ignored – given the history between the industry and the Committee. Trust was important and if ignored, could result in bad legislation.

Ms R Morutoa (ANC) commented that she agreed with the Chairperson, and MTN had not changed its view that the reduction in prices would undermine its business and inhibit services to the poor. She commented that despite the claim by MTN that the poor were benefiting from reduced prices, there was no change. The Committee had spent much time on this and there seemed to be no movement. She asked if MTN insisted on the view it had expressed at its last parliamentary hearing.

Ms Morutoa asked DoC to define its understanding of asymmetries. She requested that the explanation be contextualised in terms of both policy and the statement by MTN that asymmetries were "subsidising the least efficient companies for competition with efficient ones."

The Chairperson requested that DoC explain why MTN and Vodacom still benefited from Telkom through that arrangement up to the present. He said he found it laughable that MTN would complain about having to fund the asymmetry arrangement for three years, whilst it had benefited since inception from Telkom.

Ms Morutoa sought clarity from Vodacom on whether the 99% population coverage covered all of the country or certain provinces.

Ms Morutoa asked why it was difficult for ICASA to correct the situation of prices in SA, and wanted to know how long fixing these prices would take.

Ms Morutoa asked DoC if there was still a need to keep the asymmetries, and if so, for how long. She asked the Cell C delegation's view on a situation where asymmetries were not implemented as professed by MTN.

Ms Morutoa asked that MTN and Vodacom explain their blended rates. She asked what an effective rate meant for the ordinary person.

Ms R Lesoma (ANC) agreed and said a way to audit the information provided by operators had to be found, especially that they did not fall under entities governed by the Public Finance Management Act (PFMA). The Committee could not solely rely on information provided by the industry players.

Ms Lesoma commented it was difficult to understand why profit making companies, when requested to lower rates, would resort to staff cuts in order to counter financial losses. She asked if any of the dominant service providers in SA conducted business at cheaper rates in other African states. What was different with SA? If the perception was wrong that communication elsewhere in Africa was cheaper, then the perception needed to be dispelled.

Ms Lesoma commented that Sentech needed to provide information about which the areas of coverage by the different service providers. She knew MTN was unavailable in some parts of the Eastern Cape.

Mr G Schneemann (ANC) commented that the last two days had been riveting. The lack of submission of information to the ITU, as evidenced by Professor Alison Gillwald the previous day, was concerning. DoC needed to clarify whether this was correct or not.

Mr Schneemann said another important aspect that came out clearly in the previous days was the need for the finalisation of the broadband policy. This was coming out strongly and it would be interesting to hear comment from DoC on the matter. A number of industry stakeholders had indicated this need so that they could know how they would be able to participate in the industry.

Mr Schneemann said another worrying aspect was the time it took ICASA to investigate and conduct enquiries. It appeared that this period could take as long as 14 months. ICASA should indicate why it took so long, and if ICASA benchmarked itself against other regulators. ICASA should tell the Committee how long it took other regulators to do a similar activity. An indication had been that it was because of legislation, and yet nowhere in the legislation could the basis for such a claim be found. Interaction with other regulators in Africa so that there was a uniform approach to pricing in Africa came out strongly. He asked if ICASA talked to other regulators in Africa on the cost of communication. Yesterday there was a claim that ICASA should play a meaningful role to ensure there was competition; what were the views of ICASA on that?

Mr Schneemann commented it was clear SA was the most expensive country when it came to the cost of communicating. ICASA needed to be looking at this and clarify why SA was so expensive? If this is correct, then MTN’s claim that the poor got a good deal was fallacious.

Mr Schneemann pointed out the implication of MTN’s statement on asymmetries. This was an interesting statement especially since MTN had benefited through this arrangement. He quipped that he was puzzled by the claim that asymmetries rewarded inefficiency; for the past 18 years, MTN and Vodacom had been recipients of an asymmetry rate from Telkom. He asked if this by implication meant the two operators were inefficient. How could MTN make a statement that asymmetries rewarded inefficiency when in fact the company itself continued, even today, to receive that rate.

Mr Schneemann asked for ICASA's view on lowering the MTR rates further. There needed to be a lot more work done on the asymmetries rate and the role that it played in opening up for market for new entrants. He asked if ICASA had done any work on that.

Mr Schneemann requested that ICASA expand on a claim made on page 17 of its submission that fixed lines were not as effective as they ought to be, and yet on page 20 ICASA described fixed lines to the home as the solution. He was puzzled that ICASA indicated in the report what it ought to do.

Ms M Shinn (DA) asked if the Minister had briefed ICASA on the spectrum, and if so what had been the delays in rolling out to service providers. She asked if challenges were with how the spectrum should be allocated. There was a suggestion that it should be allocated to a consortium that would in turn distribute it. Could what was happening be explained to the Committee; and also if there were policy clashes between ICASA and the Minister.

Ms Shinn asked what was currently happening around unbundling the local loop. This was Telkom's turf, and it would want to hold on to it for as long as possible. She asked if Telkom was the inhibitor as far as the local loop was concerned.

Ms Shinn commented that it was difficult to have more than three operators in a country; SA had four. Although she accepted the statement that competition brought down prices, she wondered if SA had the kind of market that could allow for the liquidity to support mobile operators.

Ms Shinn said the Committee heard this week that the Universal Access Fund would fund the set top boxes programme. She asked if this was feasible. She also said she had asked the Minister if she would consider a private partnership to establish a broadband national network, to which she had replied no.

Ms Shinn asked if research as planned by the Department on the impact of the MTR was necessary. Who would do the research on behalf of the Department? Telkom could not afford its service obligations. Obviously this company was in a desperate state financially, and wondered how it wanted to go forward. The impact of that on the cost to communicate in the country ought to be understood.

Ms Shinn commented that the peer review study was unsettling because SA did very little trade with those ten countries. The cost to communicate impacted on trade and SA's costs were a lot higher with its main trading partners. Communication with main trading partners was very stressed. How had trade been affected by the bandwidth restrictions and the cost restrictions; this was what the country needed to see as it affected economic growth.

Mr B Steyn (DA) quoted a recent survey by a visiting scholar at the University of Witwatersrand that concluded that two in three young unemployed Africans, who had passed high school, had access to a phone. This spoke to the kind of user who relied on a service that was beyond their means. This was what the country and the Committee were confronted with. The DoC document had also indicated that SA's GDP spent on communication was among the highest internationally. These were facts that needed to be taken into consideration when looking at affordability.

Mr Steyn said he was surprised that the bigger operators did not dwell on the financial returns they made. The reality was that the operators were doing better than before the MTRs were reduced. Competition was what the companies needed to be doing going into the future as it increased the baseline. The way to reduce market prices was through competition, and it was non-existent in the earlier years. There had been more collusion between market players and that had largely led to the situation the country had found itself in.

Mr Steyn said it was disappointing that ICASA had had to be pushed to bring about the reduction of MTR. There was nothing coming from ICASA on the issue. Another matter that the presentations failed to address, despite reporting reduced prices and promotional stuff, was that if a customer was locked in a contract, that customer would not have enjoyed the reduced rates as they were locked in a 24-month contract.

There might be bundle reduction during the 24-months, but sadly every person who was locked in a contract would not have enjoyed the benefits. This was not being addressed; coupled to this was the contentious issue of unused airtime. People were paying for something they did not enjoy; if one did not use it over a specified period they simply lost the airtime. This was another reason the cost to communicate was perceived to be extremely high.

Mr Steyn commented that no presenter had taken time to respond to Prof Gillwald's comments that the zero based rate was the most appropriate. Prof Gillwald had used published figures from the major operators and indication had been that their profits had increased; no one had commented on this, the question was why?

Mr Steyn commented that Telkom had dominated the industry for so many years, to the extent of forgetting what competition was. This was the reason the company was in the position it was in today; it simply could not compete because it did not know how to compete. Telkom was left with the legacy of being a state owned company with a massive staff complement. Telkom was a player in the market and needed to find ways of becoming competitive so that ultimately it could lead to lower prices in the market.

He commented that Telkom had let a lot of impoverished South Africans down on its shares. Parliament needed to address the matter especially as it continually spoke of empowering people and yet a state owned entity had done the opposite.

Mr Steyn said it was clear from Cell C’s presentation the day before that it was competition that had brought down prices. In a normal market, when a competitor dropped prices others tended to follow suit. Why did Vodacom and MTN not bother to do this when Cell C entered the market? He shared Cell C's view that competition was needed in a market to not only stimulate it but for it to become innovative and as cheap as possible. This was non-existent in SA. One needed to have an incentive to attract new entrants into the market.

Mr Steyn disagreed with MTN that the reduced MTR led to the drop in revenue. If one took it in isolation, yes; but if one's volumes increased then they compensated for the drop in revenue. This should not be looked at in isolation. Full coverage should be sooner than 2020 and that required the working together of private and public entities. He asked MTN and Vodacom to comment on the statement that international calls were cheaper than local calls.

The Chairperson asked that the response indicate whether the MTR had anything to do with the skewed pricing.

Ms L van der Merwe (IFP) commented that all the presentations were valuable. She was taken aback by the contradictory research finding presented by MTN. The Committee did not dispute the fact that the cost to communicate had gone down, but the question was whether that had been enough. Given the levels of inequality and the legacy of apartheid, the comparison with the ten countries appeared misplaced. The country needed to create an environment where people competed on an equal footing. She asked ICASA to comment on what it thought the way forward was.

Ms W Newoudt-Druchen (ANC) commented that ICASA was not visible enough. She asked if the ADSL line for Telkom made the Internet connection any faster, and if so why was it not marketed. The comment that a lot of people had access to the Internet was not an issue, but was it affordable? Young people needed access to the Internet but could not afford it.

Ms Niewoudt-Druchen sought clarity on the contract phones and the statement that it was subsidised by the operators. It would appear that when the customer paid the contract, he was subsidising the operator.

Ms Niewoudt-Druchen sought clarity on administering the social networking sites like Twitter, BBM, WhatsApp and Facebook, and how costs were dealt with by the operator.

The Chairperson requested Prof Gillwald dispel the notion that her research focussed only on countries she worked on. At some point SA had a rural focussed interconnect project whose connection was around 00.6c, and yet a person with a cellphone in the same area was charged exorbitantly. What was the logic in that? some countries with similar approaches, gave rural areas preference on tariff and that applied to all forms of interconnect.

The Chairperson commented that none of the speakers had addressed national roaming. This was the issue that regulators dealt with. He understood that SA had a commercial arrangement; did this in any way impede competition? If left to commercial arrangement did national roaming have an impact on competition?

The Chairperson sought clarity on how the handset subsidy worked for contracts. The contract he had was on hire purchase; how did subsidy work on a hire purchase? The total cost of the handset upon completion of the contract period was double the price of the handset. He asked if the subsidy was just meant to bring the gadgets into the country? The subsidy of smartphones needed to be put in a proper context. This should be broken down so that Members understood.

The Chairperson asked ICASA if there was transparency in the pricing of communication. What exactly was paid for? Transparency in pricing was part of the market. He asked if the price for connection could be broken down as in the fuel price. Operators had claimed that the reason they build their own networks was because Telkom was not transparent in pricing. Was there transparency in this industry? This was the answer Members should have when going out on constituency work as people on the ground would be interested in these answers.

Ms Morutoa requested that Prof Gillwald be given an opportunity to clear the claim that her research was not extensive and focussed only on countries she had worked on. This was particularly important because most of the questions and the debates centred around her presentation.

Prof Gillwald’s response
Prof Gillwald replied her research had relied on a lot of different data that was representative of national data users and individual households, done across 18 African countries. This was an African research network and was concerned with ICT policy and regulation matters across Africa. The household data was indicative of countries in West, East, Central and Southern Africa. The pricing data referred to in the pricing index was done across 46 African countries, but also benchmarked against Organisation for Economic Co-operation and Development (OECD) countries. It was important to note the countries one selected.

Her presentation had sought to demonstrate that SA used to have the best penetration in the lowest markets, ten years later things had changed. Countries that were focussed on were those with dynamic markets like Kenya, Nigeria, Botswana, Uganda, but also where there was regulatory intervention on mobile technology.

The Chairperson interjected and said Prof Gillwald needed to address whether she based the research strictly on countries she had worked on.

Prof Gillwald replied no. On the pricing data, it included 46 African countries and the research was done over a year and half.

DoC response
Mr Themba Phiri, DoC Deputy Director General: Policy, commented that the Department had benefited from the public hearings. He replied that asymmetries, over and above what was said by a Member, affected Telkom more. ‘Asymmetry’ meant one way in which the available infrastructure was used to ensure the growth of the new operators. DoC’s view was that the model needed to be reviewed and the regulator was best positioned to do that assignment.

He replied that on partnerships, he had found a written response by the Minister on broadband. In reply to a Parliamentary question, the Minister had indicated broadband implementation, particularly infrastructure, could not be done by Government alone. DoC had found the statistics on how much operators spent on infrastructure investment to be significant. SA saw a concerted, incremental investment on infrastructure.

Mr Phiri replied that DoC's take on MTRs was that they had an effect on the growth of the individual operator, and as a result smaller operators were able to stage competition because they could pass that reduction on to the consumer. Cell C had indicated that it was able to do the 99c a minute offer because of the reduced MTRs. The interesting economic factor was that more people joined the networks, and therefore their businesses continued to grow. This was important because communication technologies should benefit people; if prices were inhibiting economic benefits to the people, that needed to be addressed.

Mr Phiri replied that the Universal Access Fund was available for the sector to support broadband; operators contributed to the fund. It could be that it was not enough for now but the Fund was long-term. DoC agreed with the view that the work of upgrading infrastructure had to start with a view to achieving Vision 2020. Members could consider other ways to raise what was available in the Fund. The Department of Trade and Industry (Dti) could consider incentives that promoted these investments. These could be in the Black Economic Empowerment (BEE) code, equity equivalence and all those programmes that promote this kind of culture.

Mr Phiri replied two or three issues informed the delays on the allocation of frequency spectrum. DoC had wanted to understand other markets and their frameworks for licencing spectrum. This was important; there was extensive consultation by the Department on the matter. An issue that had been raised was the open access model.

A study had been undertaken to understand that concept and how it had worked. DoC had been able to conclude the primary elements that must inform allocation. The principles included rural outreach, empowerment, and competition. The operator who got this kind of spectrum had to meet demand. The current operators had to meet capacity.

Mr Phiri replied DoC had reviewed the broadband policy and tried to address the 2010 gaps that were there. One could not proceed and allocate the relevant resources to implement broadband when the policy said something else. Alignment had to be found, and there would be clarity when Government issued the policy that informed such a framework, and that encompassed everything.

Mr Phiri replied DoC consulted ICASA and as an independent body, the regulator had its views. Those views were expressed and that did not amount to clashes. DoC accepted the fact that ICASA was governed by own statute.

The Chairperson asked if there was a broadband policy, and how DoC hoped to finalise it. He asked how the Department intended taking the policy forward, whether it intended developing it into legislation.

Mr Phiri replied the Department had discussed the issue, and only after a pronouncement by the President that there should be broadband legislation. Legislation would be the ultimate route taken.

Vodacom response
Mr Joosub commented that to counter the confusion around pricing, Vodacom was open to sharing information. A request would be that ICASA conducted proper reporting as was the case in other countries. The Regulator needed to set the standard on how the reporting should be done and simply request the information from the operators, which should look at the minutes used and the billing in a month for the effective price per minute.

Operators needed to be specific when answering the question on what was the cost to communicate in the country. Operators needed to be specific about the cost of calls according to the time of day. This would prevent tampering with things that need not be tampered with. It would allow for a focus on where there were issues such as higher costs at a particular time of the day. But this should be dealt with through such reporting. This information was published every month in Europe and was available to regulators and the general public. There was no reason for this to be a process that would take a long time, as it could be done overnight.

Regarding doubts about its information, Vodacom was a listed company and the information was audited. There should not be questions on whether the information was truthful or not, but rather did people understand the information. Vodacom was open to come and explain the information thoroughly to all stakeholders. It was important to do proper information comparisons holistically.

Prices were going up in other African countries because regulators had realised that prices had become so low that investment had stopped. The DRC and Tanzania experienced over 20% increases last year. When looking at the pricing information, stakeholders needed to take into account the nuances of these particular markets and how they had responded to issues.

Mr Joosub replied that 99.7% of Vodacom's network was on 2G coverage, with 84% on 3G coverage. These included the Northern Cape.

The change in the numbers for MTRs last year was because there was an issue with international fraud. That had since been corrected, and a R2 billion reduction since 2009 to 2012 in interconnect revenue was recorded. There had been an impact. Vodacom had tried to minimise the impact by reducing commissions in the distribution, by reducing expenses and curbing costs. This was not to say MTRs did not have an impact, they did.

Mr Joosub replied there was no hire purchase on Vodacom contracts. Customers had an option to take a contract with or without a device. The cost of the device was financed over the 24 months; there was no interest added to it. Higher purchase would indicate interest on top of the original amount. The contract was really meant to provide customers with an opportunity of a subsidised phone. Penetration in Africa was generally low because there were no subsidies. Subsidies had a role to play. Ultimately the customer should have the choice of whether they wanted to take the subsidy or not. He explained that the BlackBerry Internet Service was a fee that was charged over and above the contract. Whatsapp was problematic as nothing was charged. This could be an area for another parliamentary committee investigation because owners of social networks did not pay taxes; the money just flew to the United States.

Mr Joosub disputed the statement that international calls were cheaper than local. Yes, there was a promotion of 89c per minute, but there was a R5 opt-in charge. This basically covered the cost of the international calls.

National roaming played a big role in helping smaller operators to have access and be able to establish themselves quicker. This had resulted in a lot of competition with MTN, because both companies had the infrastructure. Nothing could replace the level of investments. The amount of investment put into the network was important for it to be successful. This business was capital intensive and needed investors with deep pockets. It was important to keep this in mind when considering licences for new operators. Consolidation was needed in the market to avoid a situation where each operator was replicating the same infrastructure. In the building of the fibre network there was an opportunity to work together. The proposal to establish networks for everybody was put to Telkom four years ago, but it refused. This had necessitated that Vodacom put up its own networks, as the Telkom cost was too high. It was not true that the operators did not try and bring down the MTRs. Three years before MTRs were dropped, operators had made an offer to the then chairman of ICASA to effectively drop the rates. Operators were told this was not their territory.

The Chairperson interjected and asked which ICASA chairman was this.

Mr Joosub replied, Paris Mashile. The proposal was turned down because this was for ICASA to decide, and it eventually did. The operators tried to bring down the MTRs proactively.

The Chairperson asked why were the operators fighting the idea to drop rates so much if they were the ones who proposed it.

Mr Joosub replied they fought it not because they did not want to implement, rather they needed time to implement. The operators dropped the rates before the actual implementation from ICASA and started with their own glide path. Operators got to a point where they realised they would be blamed and rather chose to make the move. The glide path then came after the first drops had happened.

The Chairperson commented that the CEO was lying. This needed to be placed on record. Lowering rates was never a voluntary move by operators.

ICASA response
Ms Marcia Socikwa, ICASA's Acting Chairperson, commented she agreed with the Chairperson that it was Parliament that accentuated the dropping of termination rates and not the operators.

Mr Pieter Grootes, ICASA's General Manager, said the reason market studies took so long was because ICASA's position was that decisions had to be evidence based. ICASA had to take into consideration what the benefits would be for SA, and the cost in proposing an intervention. When initiating an inquiry into a particular activity in the industry, it would have to consult widely. In preparation for such an inquiry, the Regulator had to prepare and engage in significant design of the kind of information required.

Also the operators required a significant amount of time to provide the information needed. That information was simple information on tariff transparency and the number of minutes called. This was very detailed information in terms of costing. This could take up to nine months for ICASA to design the information and the collection mechanism for operators to collect the information. ICASA would then have to analyse the information.

The Chairperson interjected and said Member knew the process of an inquiry as it was contained in the ICASA Act. What the speaker should indicate were the legislation hiccups that hindered the Regulator from expediting market research. The Committee made the legislation.

Mr Grootes replied one area in the legislation that was the barrier was the 90-day period allowed for public comment. If that could be shortened it could help.

Mr William Stucke, ICASA Councillor, said ICASA needed to play a more meaningful role to ensure meaningful competition. Some of the interventions already taken on broadband data and the voice value chain included identifying niche markets, and who the players were. This also extended to determining if any of the players had significant market power and whether competition was effective or not. If competition was not effective, then ICASA had to devise remedies. This process was commonly referred to as market review, and was quite an extensive exercise.

The Chairperson commented that there was the view from Cell C that despite all this process, there were certain things that could be done in order to promote competition.

Mr Stucke replied this was correct and an example was ICASA’s short-circuiting of the process as it had persuaded Telkom and Sentech to reduce prices to other operators.

The Chairperson asked what processes ICASA needed to save Telkom from continuing to subsidise Vodacom and MTN.

Mr Grootes replied Telkom had had a mobile operator and sold it and now had another one. When mobile operators came into the market the termination rate was around 20c. The amount later went to R1.25c; Telkom was the provider to these companies but did not negotiate strongly in terms of how it could have had a rate reduction.

The asymmetry referred to was a result of commercial negotiation between Telkom and other operators. In the future, a number of speakers had called for a flat rate of termination between fixed and mobile. This had happened in Tanzania; ICASA would have to consider it in the upcoming market review.

With regard to markets that needed to be looked at there were a number of things including essential facility. Essential facility was something that was not easily replicated. Access to essential facilities was to be regulated through access offer, where transparency of everything was provided; as well as a cost base situation. Examples of these were access to international cables; SA already had more than one. ICASA would also look at the cost of long distance. This was part of the value chain study.

The next one would be the termination rate; there were things ICASA could look at in the retail market such as carrier pre-selection. He explained carrier pre-selection as the ability to choose on a call by call basis, which operator a customer preferred to use. This only worked if the origination rate - cost of starting a call - was regulated; right now it was not. The study would also look at the on-net versus off-net price differentials and also the hold on the distribution chain.

He pointed out that something that was not discussed in the cost to communicate in SA was the cost of pay television in SA. This was a form of communication as well. ICASA would want to look at what it would call a broadcasting market review to facilitate competition in the pay-TV and the free to air environment.

Mr Grootes said pricing transparency would drive competition, and this was something ICASA would like to look at. The regulatory or legislative cost drivers were critical to the deployment of networks. The fees charged by municipalities for a high-site were also a significant issue; he cited an example of a municipality in an impoverished area and yet in one year it had increased the rent for a high-site four-fold. This was happening across the country.

Another thing that ought to be looked at was the role of other state-owned entities like Sanral, Eskom and Transnet. These entities charged operators money to dig up the road and deploy networks. Did this make sense? Another important aspect was the role of private property companies as well. These were the core market review activities that ICASA would like to do in order to faster reduce the cost of communication in SA.

The Chairperson commented ICASA better ensure that these were contained in the 2013/14 strategic plan. He requested that Eskom comment on its inability to negotiate.

Ms Socikwa said the strategic plan would have to work with the enhancement of budget and capacity. If these were enhanced, the scope of capacity for ICASA could be expanded.

Mr Grootes replied on users interconnect at 6c and why it was not extended to the mobile networks. This was because community service telephones had two objectives: to bring communication to impoverished communities and to drive local business development. The 6c was the termination rate charged; the R1.25c was used to assist local business to get off the ground. When the cost of communication was high because capital investment was necessary, it was not possible for everybody to own a handset. People had access to the phones because of the way in which community service telephones were subsidised by the differential termination rate. The role of community service telephones had reduced as well as the ability to be subsidised and had resulted in the termination going down to 40c. The 6c and the 40c did not give the buffer to keep those operations going. Were those operations necessary – this was the question that had to be asked?

Mr Leweng Mphahlele, ICASA Manager, said national roaming could potentially affect competition. With Cell C's 99c tariff plan and the cost of termination, Cell C was already on the negative. In terms of the process that had to be followed, ICASA had to follow the Chapter 10 process and seek to understand the cost of doing the national roaming service.

Ms Morutoa asked why it was difficult for ICASA to correct the situation.

Mr Grootes replied retail rates were determined by competition. ICASA could intervene only if it was proven there was lack of effective competition in the market.

Prof Gillwald commented that the implication for the region was severe. It was important that decisions were taken after widespread consultation. Lots of African governments were in the ‘conflict of interest’ position that the SA Government was in. She called for greater consultation in representing the people of the country widely.

Telkom input
Mr Manelisa Mavuso, Telkom's Managing Director: Customer Relations, commented that there were not too many questions asked of Telkom. He conceded negotiations on asymmetries were not done effectively. There were examples of how other countries had approached that. Discussions were more about structural issues as opposed to the customer's experience on pricing. Telkom remained committed that industry players needed to work together on key aspects of pricing.

Mr Izaak Coetzee, Telkom's Executive, commented that it was true that Telkom had upgraded speed on ADSL. The company could have done better in notifying the customer on what it was doing on their behalf.

Countries in Europe had longer asymmetry periods to allow new entrants to settle in. Telkom believed the three year period was not sufficient especially as the incumbent benefactors have had this benefit for 18 years.

Mr Coetzee said Telkom believed that national roaming needed to be regulated, and that it could assist in avoiding the duplication of networks. This was important because new entrants needed to get the new networks up and running with the well-established operators.

The agreements in 1993 were not negotiated on a bilateral basis. Those agreements were multi-party and included Vodacom, MTN, the Post Master General, and the Minister. The feeling back then was that Telkom, having been well established, would not allow the new small players in the sector.

Neotel input
Mr Peter Zimri, Neotel's Senior Specialist Regulatory Economics, commented that there were no direct questions for Neotel. The company had done what the Regulator had asked to reduce the prices. Neotel had dropped prices by 62c, the company had done what was required by the law.

Cell C input
Mr Robert Pasley, Cell C CSO, commented that it was true that the multi-party agreements were not negotiated like that. Telkom MTR was set at own retail price, at the time, that was around 21c. This was for Telkom customers, and the MTR for mobile networks was agreed between Vodacom, MTN and Telkom.

The fact that those prices represented an asymmetry of 400%, and still existed, was more remarkable, especially considering objections to asymmetry today to help new entrants to the industry. It was beyond comprehension why ICASA would need 14 months to decide on whether this was wrong. This could be changed tomorrow; Telkom was not a big incumbent any longer.

MTR was a direct cost on any off-net call. The reasons that international calls were cheaper were because the international MTRs were lower. Countries could be benchmarked but the fact was, the cost to communicate in SA was among the most expensive countries. The effective tariff had no bearing on the consumer; when a consumer made a call the only effective price was the price the customer had to pay at that particular point in time. This was a large price with ICASA. The innovative ways operators used to bring the cost down were excellent, but that should not obscure the real cost to communication.

Mr Pasley said national roaming was a big input cost and set an effective flaw. This was regulated in many countries in the world. The community phone tariff was the only tariff that was regulated by ICASA. This was not a tariff lodged through operators; this was what ICASA decided upon. The primary reason the community tariff was put together was to ensure people in the under-serviced areas got an affordable tariff.

The fact of the matter was that with tariffs of 99c, the community phone shops had become unsustainable. It was surprising that the Regulator had not stepped in and reviewed the tariff. If such a low tariff could be charged in rural areas, why not charge the same rate in all under-serviced areas. This would solve all the problems. This seemed logical.

Mr Pasley said the earlier statement that operators had commissioned a study was incorrect. Cell C did not endorse the study, and therefore dissociated itself from the findings. This was not to say they were wrong or right, but the company did not endorse and dissociated itself from the findings. The country was stuck in a model developed in the 1990s, and if there was a need to subsidise handsets, to some extent that need had disappeared. This was the reason people got fridges, laptops and microwaves on top of a handset, and this had increased the cost to communicate. The Regulator needed to stop the inclusion of appliance costs into the cost structure of telecommunications.

On the tariff side, the most important thing was transparency. The consumer wanted transparency and asked for a breakdown of the amount they paid. This was a fair request, and also would be fair for operators to come clean and disclose that to the consumer.

MTN input
Mr Pienaar said the challenge was that the research that had always been undertaken did not expose the detail of ‘effective rate’.

Mr Pienaar explained ‘effective rate’ as the total minutes on the network divided by the total money operators got for the minutes. This gave one a true reflection of what customers paid. On MTN Zone customers were made aware of the tariff, and subsequent to the call they were alerted to what the tariff was.

Mr Pienaar said he heard Cell C's view on the research but nevertheless the company contributed to the research equally. Everybody contributed data, and the results were what they were. The industry needed to get better data; organisations like cellphone operators depended on the quality of data to make decision. The quality of data was lacking, and MTN would also happily avail the data required by ICASA.

Mr Pienaar said the interconnect agreement was negotiated with Telkom over a period of months. Until today interconnect between a fixed line and a mobile were very different. The reason was because fixed line did not have as much variable cost; it was all about cost. There was a 4-1 variable between the two interconnects.

Mobile was more traffic sensitive. When a customer made a call, the operator would make a bit of investment as well. The general precedent across the globe on interconnect was the fixed line was treated differently from the mobile line. People had incorrectly blurred the two; the reality was that for 11 years, Cell C had also had the benefit of the "so-called" asymmetrical rate between fixed and mobile.

Mr Pienaar explained that interconnect was about cost. If another network operator wanted to connect on another's network, at least that should provide some return. It would be bad business if it was below cost, and zero was below cost. The big debate should be at what cost should interconnect be carried, as zero was not logical.

MTN had invested a lot of money in connecting customers, and had subsidised the handsets. Some of the cost needed to be carried by other operators when they wanted to connect to an MTN customer.

Closing remarks
The Chairperson commented that he found it odd that South Africans ability to communicate should be hindered by price, and be limited to only when operators had promotions and specials. It was realistic that at any given time operators had a monopoly on when the citizens communicated.

Whether it was retail price or effective rate it did not matter; all that mattered was whether at a given time communication was affordable to South Africans. Dynamic prices were fine; but the question had to be raised on whether it was affordable to communicate.

The presenters had alluded to the sad fact that even the regulator did not know how much it cost to communicate in the country. Operators ought to submit the prices to the regulator. If the regulator did not know what was the point of having a regulator?

The custodian of the actual pricing was the regulator and if it did not have that information available, then there was a problem. Operators could therefore not count daily specials as the cost to communicate. For the Committee the important figure was the one before the regulator, and not those given by each operator.

If the system was flawed to the extent that the regulator did not have the correct information, it should be stated as such. The Committee could not be told that the formal price was not known whilst formal submissions to the regulator happened. This was how things should function; anything outside of this process did not stand.

Members should not be regarded as naive when they asked how much it cost a South African to communicate.

Whips of the different political parties were allowed to make end-of-year festive messages.

The meeting was adjourned.