BOTH the Independent Communications Authority of SA (Icasa) and the Competition Commission have cast their eyes on the pricing of fixed-line and cellular operators. International comparisons (or benchmarking) on pricing have painted a gloomy picture while the annual financial statements give the impression that the operators have found a way to print money.
In a free market, simple economics place price levels at the point where the supply and demand curves meet each other and where price equals marginal cost (the cost of producing one more unit). Simply put, if prices are above that level, it indicates that there are profits being made, which will draw new entrants into the market. If prices are below that level, which is indicative of an oversupply, suppliers will leave the market. If output is below that level, it indicates that monopoly profits are being made.
Clearly, an artificial restriction of the number of suppliers will inhibit demand and push prices upwards. The fewer players in a market, the less likely they are to price competitively or, at least, drive prices down to competitive levels.
A free market dictates that there should be no impediment to suppliers entering or leaving markets other than economic ones. For example, it is relatively cheap to enter the market for the sale of hotdogs on street corners, but relatively expensive to start making motor vehicles or operating an airline.
In a regime where someone else decides who shall enter a market, the dynamics change. If a market player, especially a dominant firm, restricts entry of newcomers into the market, we refer to this as an “exclusionary act” and use the Competition Act 1998 to punish the perpetrators.
This recently happened when SAA was fined R45m for putting in place incentive-overriding commissions, which made it extremely difficult for firms to expand and new firms to enter the market. SAA has appealed against the fine.
Government also has the ability to restrict entry into markets. There are four generic ways of doing so: import controls, excessive import duties, qualitative controls, and licensing.
The telephony market is typical of such a market. Government decides who receives a licence. It has decided that two (but not three or four or five) fixed-line operators “are enough” to supply the market. It has decided that at first two, and then three, cellphone operators are sufficient to supply the market. It has placed a regulator in place to try to limit the level of prices charged (singularly without success).
The regulator can fine the operators for being involved in conduct designed to restrict, or having the effect of restricting, competition. However, government is able to restrict competition without much being said about it.
Another interesting fact worth noting is that a restrictive licensing regime vests a huge amount of goodwill in the licences. This translates into money in the pocket for licence holders in the event that they want to dispose of the licence.
A few rules should apply.
First, one would concede that public-interest considerations that justify some form of licensing of participants might exist. The considerations might vary. For example, public interest would dictate that only those in possession of specific qualifications should be permitted entry into, say, the medical or engineering professions. Government, quite rightly, should lay down objective criteria as to what those qualifications should be based primarily on health risk or engineering risk considerations.
Only a person in possession of a valid driving licence should be permitted to drive a motor vehicle for obvious public interest (safety) reasons. Theoretically, only a vehicle that is roadworthy should be permitted on the road.
Clearly, what constitutes the public interest should be carefully considered — and fully and honestly debated. Government is, for example, considering reducing the entry requirements for medical professionals relating to the duration of study and internship to ease entry of historically disadvantaged people into the profession.
Earlier it increased the duration of internship though obligatory community duty. In this instance, the public interest relating to easing entry would have to be weighed against the risk to the public.
However, once those criteria are determined, the number of entrants entering the market should be left to the market to decide. No faceless officials should be empowered to decide who should and who should not enter the market. Neither should they be permitted to decide that X is enough but Y is too many.
Incidentally, such a regime all but eliminates the potential or incentive for graft and corruption, which come into play the moment government officials are able to decide who shall and who shall not enter a market.
The principle, as it applies to the professionals, should be applied equally to all fields of economic endeavour.
This is clearly illustrated by what happened in the domestic airline industry. Not too many years ago, all domestic routes were, essentially by governmental decree, the exclusive domain of SAA. When government tentatively opened the skies in the early 1990s, SAA was quick to use its dominance to eliminate new entrants — remember FliteStar and Sun (Bop) Air?
But now market forces decide who shall and who shall not enter the airline market. Certainly, the public-interest criteria have been set with regard to aspects such as safety. However, the fact that the competition authorities are the first choice of regulator confirms that entry and exit are not determined by government officials. New entrants can challenge existing players across the board or in niche markets.
Similar rules should apply to the telecommunications industry. Certainly, the “fattening up” of Telkom to increase its attractiveness to new investors did not benefit the consumer.
Similarly, the continued delay in licensing a second fixed-line operator has been to the detriment and cost of the consumer. The whole process has actually given rise to enrichment rather than an empowerment exercise and has been chronicled at length. The fact that a restricted licensing regime is in place has directly contributed to this situation.
But nobody has provided a satisfactory explanation to the simple question: why only two fixed-line operators? Why not three or five or seven? Ditto the cell phone operators.
The infrastructures that have been established have been financed by the excessive prices consumers have been charged. Cellphone operators and fixed-line operators are perfectly capable of using each other’s networks, which means that duplicate networks are not necessary. To use an analogy, we do not need to have five or seven railway lines running next to each other.
Thus, general competition policy would dictate that where licences are required, objectively justifiable public-interest criteria should frame the licensing regime, and all firms or persons that conform to the licensing requirements should be permitted entry without fear or favour.
‖Appelbaum is a partner in the competition law unit of the corporate and commercial department at Sonnenberg Hoffmann Galombik.
Sign up with Google
