Building capacity to help Africa trade better

Boosting competitiveness in the South African telecommunications sector


Boosting competitiveness in the South African telecommunications sector

Paul Kruger, tralac Researcher, discusses competitiveness in the South African telecommunications sector

One can argue that the telecommunications industry is the central nervous system of an economy – it connects all parts of the network and rapidly shares vital information between its connections. It connects users to one another and to information, which is critical to the operation of every organisation. It is hard to imagine how a country without a robust telecommunications sector can stay competitive in the global economy. One of the most important features of any telecommunications industry is internet penetration – the number of consumers having access to the internet. The quality of the infrastructure and speed of the connection are crucial issues, but in South Africa one of the main concerns remains price.

Telkom, South Africa and Africa’s largest communications company has argued time and again that its pricing structure is competitive when compared with international peers. MyBroadband.co.za has done its own price comparison to put the claims of Telkom in perspective (read more here). It found that Telkom’s entry level package is priced similarly to other countries, but only if the benchmark does not consider the speed and volume of the offering. From MyBroadband’s detailed comparison, it is clear that South Africa is significantly more expensive if calculating the cost per Mbps (speed) and per GB (volume). The last ten years of telecommunications development has been fundamental in creating an enabling environment where business can compete effectively in the global economy – but has South Africa, and by implication, Telkom done enough to contribute to enhancing our competiveness?

Last week, the Competition Tribunal heard closing arguments in a case that started in 2002 with complaints about Telkom abusing its monopoly position in the market. Telkom is accused of anticompetitive behaviour, including practicing exclusionary pricing, limiting value-added network service (VANs) providers’ ability to provide services to customers, and knowingly hampering competition in the telecoms sector. In 2009 the Competition Commission found that Telkom charged excessive prices for the basic infrastructure needed by its downstream competitors to access a range of telecommunications services, while keeping its own charges low. The Commission concluded that Telkom charged excessive prices after comparing Telkom’s prices to its costs, prices in other countries, prices of other operators offering similar services and prices to customers of Telkom who posed a competitive threat to it (Competition Commission Press Release). The Commission recommended that Telkom be fined a total of R4.5 billion, an administrative penalty that could wipe-out almost a third of the operator’s value. In its defence, Telkom argues that such a hefty fine ‘will have disastrous consequences for the South African economy’ and is instead proposing a fine of R20.5 million. This is roughly equal to a few days’ worth of profit in a bad year. Unfortunately it is impossible to calculate the true cost to the South African economy or the value of opportunities lost in the global arena. The reality is that uncompetitive practices, especially during the formative years of the internet, will have long-term knock-on effects.

The Tribunal is currently reviewing the case and a finding will be made in due course. It has also requested Telkom to outline behavioural changes that could be considered in addition, or in place of, a monetary penalty. The purpose of the penalty is to act as a deterrent, both to the offending firm and other firms that consider engaging in the same type of behaviour. Especially in the telecommunications sector, it is about more than money – it is about changing the behaviour of the near-monopoly provider. But indications are that Telkom will be slow to let go of the stranglehold it has on the fixed line communications industry. It is therefore the responsibility of the Minister of Communications and the Independent Communications Authority of South Africa (ICASA) to create a more competitive environment in the sector. In fact, the government is obliged in terms of its international commitments to maintain “appropriate measures … for the purpose of preventing [major] suppliers … from engaging in or continuing anti-competitive practices.” (WTO Telecommunications Reference Paper 1998).

During the last ten years these institutions have been slow to establish more favourable conditions despite licensing a Second National Operator (SNO), Neotel in 2005. Ideally, local loop unbundling should be introduced at the same time a market is liberalised in order to promote competition on an equal footing, until such time as the provider can build its own infrastructure. This process refers to opening up access to this ‘last mile’ that connects the exchanges to the consumers, by leasing it to competitors. The understanding was that Telkom would retain control for two years following the licensing of Neotel, after which the unbundling process would proceed. Since then the regulatory structure of the market has changed significantly with VANs now having the right to build their own networks. However, due to the capital investment and time required to build and deploy an additional network, there seems to be no viable alternative to the implementation of local loop unbundling. Unfortunately, the unbundling may prove to be too late as South Africa has potentially lost out on intense competition to improve the fixed line sector when it really mattered.

Despite the influence of Telkom, the downstream competitors are waging an intense battle for the remainder of the market. Some Internet Services Providers (ISPs) are even cutting their ADSL line rental – which they buy wholesale from Telkom – by as much as 50 percent. For the slowest line, Telkom charges residential consumers R152 while certain ISPs only charge R100 for the same service, in effect subsidising the Telkom offering to attract business. It is this kind of vibrant competition between ISPs that have preserved the fixed line sector to some degree. Increased competition from the mobile operators and their 3G offerings will also make it harder for Telkom to defend its traditional turf. Change is coming – but it is more likely that it will be driven by the private sector and not by government.



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