It was always going to be a face-off. This week’s colloquium on telecommunications prices, the second such event, was set to accentuate polarisation in the industry between entrenched interests and those demanding a market opened to greater competition.

As government signals its intention to liberalise the telecom sector faster, one proposal, put forward by the SA Foundation, looks set to ruffle the most feathers: that operators terminate telephone calls from rivals at cost.

Interconnection, as it is known in the industry, is one of the biggest profit generators for the network operators. The problem is, it’s also one of the biggest obstacles in bringing down high telecom prices.

The SA Foundation, which represents 50 of SA’s largest companies, recommends that interconnection fees be reduced to cost to give the soon-to-be-launched second network operator (SNO) a more competitive platform when it starts operating.

The foundation’s proposal – one of 12 measures it believes must be taken to reduce prices – adds to the pressure already being exerted on operators by government. Foundation executive director Michael Spicer says he is confident the colloquium, which concluded after the FM went to press, will deliver the results needed.

Because the SNO will be mostly dependent on the networks of Telkom and the cellular operators to terminate calls made by its subscribers, the interconnection rate will have a major bearing on the cost of calls. "This clearly gives an incumbent operator such as Telkom an opportunity to disadvantage its competitors by setting high interconnection charges," the foundation says in its proposal documents.

Getting large operators such as Telkom, Vodacom and MTN to give up the profits they make from interconnection could prove challenging, though. MTN generated more than R6bn in revenue from interconnection fees in its financial year to March 31; Vodacom generated R5,9bn in the same period.

About 40% of Telkom’s call revenue is from fixed-to-mobile calls. Three-quarters of costs associated with these calls are interconnection fees paid to mobile operators, says James Hodge of Genesis Analytics, which compiled the report for the foundation. He says reducing these fees to cost would shave 10%-15% off the bills of Telkom customers.

Telkom declined to comment on the foundation’s proposals ahead of the colloquium. Government was set to table a range of measures at the event which, if implemented, would have a direct bearing on Telkom’s profitability. These include regulation of the undersea cables that link SA with the world and the unbundling of the local loop, which would give competitors access to its telephone exchanges.

Telkom’s 50% associate company, Vodacom, has spoken out strongly against many of the proposals put forward by the SA Foundation. It has described the proposal to reduce interconnection fees to cost, for example, as "ludicrous".

It says doing so would lead to new investment in the sector drying up. It says interconnection charges are negotiated between all operators, and are approved by the Independent Communications Authority of SA (Icasa), which regulates the sector.

SA’s smallest cellphone operator, Cell C, says Icasa must provide leadership on the issue. Existing regulations oblige Icasa to impose cost-based interconnection on "dominant" operators. However, the regulator has not classified either Vodacom or MTN as dominant. Before intervening, Icasa would have to conduct a market study to determine who would fall into this category.

Icasa chairman Paris Mashile says interconnection fees are a concern. Icasa will soon hold hearings on the issue. "That’s where the fat is," he says.

Given "sensitivity" around interconnection fees, Icasa first wants to get the views of industry before drafting new regulations, Mashile says.

Dave Gale, business development director at niche telecom service provider Storm, says Icasa should adopt a "measured" and "controlled" approach to cutting interconnection fees. A rapid reduction, he says, may be disruptive to the market.

Gale advocates imposing specific rules on companies that want significant market power. He recommends that SA follow the UK model by stringently regulating companies that have considerable power and imposing a lighter touch on less dominant operators.

The SA Foundation makes other recommendations, too. It says cellular operators should not impose minimum call charges. It also advocates a broad range of contract periods – not only 24 months, as is usually the case today.

But Vodacom says the foundation’s suggestions would simply suppress competition and reduce the range of options available to consumers.

It says telecom networks can be provided in one of two ways: by government or by private investors. If private capital is the preferred option, then competition is the only mechanism for price regulation, Vodacom says.

All tariff plans and prices are already strictly regulated by Icasa, it adds. Further regulatory intervention will not reduce prices, but will drive private investment away, Vodacom says.

It warns that "once lost, [investment in telecoms in SA] will not easily be restored. Then we might debate how to have a telephone again, as opposed to what we pay for a telephone call."

Mashile backs Vodacom’s view that competition is key to driving down prices. "People should have as wide a choice as possible in the services that are offered," he says.

If consumers are no longer locked in to buying inflexible packages, operators will have to compete on price, Mashile adds.

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