How to reduce telecoms costs

ECN recommends that ICASA immediately set the interconnection rate at R0.25 (peak) and R0.15 (off peak)

South African telecommunications prices, fixed and mobile, remain among the highest in the world. Excessive interconnection rates are at the root of high prices. Whilst ICASA has released a further set of draft interconnection regulations, these regulations do not address the issue of interconnection rates and will therefore not have the effect of driving prices down.

ICASA needs to move swiftly and address high interconnection rates to avoid market exit and ensure that operators compete fairly for market share. ICASA can now look across South Africa's borders to Namibia to find the solution for high telecommunications pricing.

The Namibian Communications Commission (NCC) has introduced a standard charge structure which has decreased interconnection charges by up to 43% in Namibia. Prior to the NCC's intervention, mobile operators in Namibia were charging the rand equivalent of R1.06 per minute to terminate calls on their networks. As of 14 July 2009, the interconnection rate ceiling for calls terminating on both mobile and fixed networks (i.e. symmetric interconnection rates) in Namibia is the rand equivalent of R0.60 per minute charged in per second increments.

The NCC has introduced a glide path model that will see interconnection rates decrease every 6 months until the ceiling interconnection rate for both mobile and fixed networks reaches the equivalent of R0.30 per minute in January 2011.

In South Africa interconnection rates between fixed and mobile operators are not symmetrical. The Vodacom, MTN and Cell C interconnection rate during peak times is R1.25 which is more than 4 times the Telkom interconnection rate and in some cases the mobile operators’ fixed retail rates are up to 900% of the fixed interconnection rate.

Setting interconnection rates that are at the level of an efficient operator provides incentives to be efficient and symmetric rates promote competition. The international trend for mobile interconnection rates is towards the cost of an efficient operator.

The NCC therefore recently commissioned a benchmarking study by Research ICT Africa which found that the cost of interconnection for an efficient operator is the rand equivalent of R0.25. The study looked at interconnection rates and the cost of interconnection in various African and European Union countries to arrive at this figure. Even given different country characteristics, it is clear that there is either rank profiteering in the South African mobile call termination market or that our mobile operators are particularly inefficient.

Benchmarking is a common sense method of setting interconnection rates. The operators in Namibia agreed that international benchmarking is the preferred approach to determine interconnection rates prescribed by the regulators when carriers fail to agree on terms of interconnection within a reasonable period.

The Namibian study and European Union Commission Recommendations strongly advocate symmetry in interconnection rates. Symmetry between mobile and fixed interconnection rates supports fixed-mobile convergence and removes market distortions that would advantage mobile operators. 

High mobile interconnection rates make it harder for other fixed line and new entrants to compete with large mobile operators – a new entrant needs to be able to compete in its off-net rates if it is to attract new customers. Substantial differences between mobile and fixed interconnection rates favour mobile operators in offering converged services whereas symmetry between mobile and fixed interconnection prevents bias towards mobile operators.

In explaining the need to regulate interconnection rates to boost competition, a recent EU Commission press release states: “Higher mobile termination rates make it harder for fixed and small mobile operators to compete with large mobile operators.”  A new entrant needs to be able to compete in its off-net rates with the incumbents’ on-net rates to be attractive to a switcher. This is because a customer moving from the incumbent’s to the new entrant’s network will change from making mostly on-net calls to making mostly off-net calls.

The migration towards next generation networks which denotes the convergence between traditional fixed and mobile telecommunications network with the Internet raises many issues in relation to interconnection. Symmetry between mobile and fixed interconnection rates supports this convergence and prepares markets for the smooth transition to next generation networks.

The Electronic Communications Act imposes a technologically neutral licensing framework for converged electronic communications networks and services. South Africa's electronic communications service providers can offer both fixed and mobile services and these services are converging as electronic communications networks evolve.

ICASA has, for some time, been busy with a market study in terms of the competition provisions of the Electronic Communications Act with the view to making determinations on market power of the various operators and thereafter imposing pro-competitive measures which should reduce prices. The market study is a lengthy exercise and is fraught with difficulties.

Any determinations on defining markets and market power will undoubtedly be challenged by larger operators seeking to delay the reduction of interconnection rates and other pro-competitive measures. However, a benchmarking study on interconnection rates is an efficient and pragmatic basis upon which to deal with the cause of high telecommunications prices. ICASA need not commission a new study from scratch when the groundwork is comprehensively covered in the NCC benchmarking study.

ICASA can use the Namibian benchmarking study to model interconnection costs in the absence of detailed information on local cost inputs. The study is a sound basis upon which to reduce interconnection rates to a level that bears some relation to the cost of an efficient operator. The study also provides a basis to impose symmetrical mobile and fixed interconnection rates.

Rather than placing the onus on ICASA to carry out a full forward-looking cost analysis, ICASA can permit any operator that is dissatisfied with the benchmarked rate to request a revision of the rate by demonstrating that it has forward-looking long-run incremental cost of interconnection that is above the prescribed ceiling.

Recommendations

In line with international best practice and the Namibian Interconnection Benchmarking Study, ECN recommends the following:

1. interconnection rates should be transparent, unbundled, non-discriminatory and close to the cost of an efficient operator;
2. the cost of interconnection should be determined on benchmarking the cost of interconnection in jurisdictions that have implemented accounting separation or other appropriate means to establish the cost of interconnection;
3. interconnection rates should be network, technology and service neutral in line with the policies of the ECA and should facilitate the emergence of fixed - mobile convergence and IP-based NGNs; and
4. ICASA needs to monitor market developments closely and conduct regular reviews of interconnection rates to ensure that the rates are kept current in the light of continuing declining costs.

Interconnection is not about profit – interconnection charges should be entirely cost-based.  ECN recommends that ICASA immediately set the interconnection rate at R0.25 (peak) and R0.15 (off peak); this target rate should be applicable for any voice service regardless of the technology used.  This is in line with Telkom’s interconnection rates on its new mobile CDMA service (CDMA is a digital cellular technology standard that is used to provide mobile voice telephony and broadband internet access).

We believe that high interconnection rates have distorted the market for too long and South Africa cannot afford to wait another two years before all networks are allowed to compete fairly. New entrants are currently under severe financial strain and a real risk of market exit exists. Such a drastic reduction in interconnection rates is rarely applied internationally; however, the situation in South Africa is equally rare in its unfairness to new entrants.

Conclusion

In a well-functioning market, competing suppliers are incentivised to reduce costs, pass reductions to customers and innovate with new products and services. The current interconnect regime is preventing this from happening in South Africa; the ultimate losers are ordinary consumers who have to put up with underperforming networks and unacceptably high prices. 

ECN is sending a copy of the Namibian Interconnection Benchmarking Study to the ICASA, the Department of Communications, the Parliamentary Portfolio Committee on Communications and the Competition Commission and hopes that South Africa’s politicians and regulators can learn from our neighbour and rapidly adopt the findings in the study.

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