The government should consider delaying plans to list Telkom by next February and the prospects for the second national operator are looking increasingly bleak, says a leading telecommunications analyst.
Franca di Silvestro, a telecommunications analyst at HSBC, says the second operator has little prospect of delivering lower prices to consumers.
“The government should refrain from committing itself to a date, to avoid disappointment. It should just say it will list when the market conditions allow,” she says.
Pam Sykes, a telecommunications consultant at the BusinessMap Foundation, concurs: “We missed the boat before the telecoms bubble burst in 2000.”
Last week the telephone utility delivered its latest financial results, the last under its five years as a licensed monopoly. Telkom posted what Di Silvestro describes as the expected set of results, with a net operating profit of R1, 9-billion.
The results proved to be ample demonstration of the utility’s belief that the future is wireless.
Through it’s 50% holding of Vodacom, Telkom’s wireless operations contributed 38% of the operating profit.
Telkom chief executive Sizwe Nxa-sana confirmed at the presentation of the financial results that the utility would be looking to Vodacom to lead its expansion into Africa.
Telkom’s fixed-line operations lagged behind. Revenue from data services grew by 18 % to R3,7-billion. But the division also gave Telkom a R1-billion bad debt headache because of disconnections.
During its monopoly, Telkom connected 2,67-million customers, but only 667 039 of them remain active. The increasing popularity of cellular phones and a high default rate were cited as the main reasons for the disconnections.
Di Silvestro believes the loss is a lesser evil than allowing competition earlier, which would have eaten into Telkom’s business.
“Strategically it is better for Telkom to be in this situation,” she says “If Telkom had not enjoyed the period of monopoly, you would have had a situation where competition would have come in and actually taken business away from Telkom. It would have lost more than the R1-billion it’s lost now.”
This is an abject lesson in the market’s allocative efficiency.
“It is disappointing that the government has not got the message that if there is a market that can sustain a service [the service] will be delivered,” says Sykes.
Telkom and the Independent Communications Authority of South Africa (Icasa) recently reached an agreement that the regulator hopes will stem the tide of disconnections.
Payment defaulters will no longer be disconnected immediately. Consumers will be allowed to maintain a lifeline service to make emergency calls and to receive calls, provided they pay rental for the line.
The contentious part of the agreement allows Telkom to implement 24% tariff increases, which contravene the current regulations.
The agreement limits revenue increases over the next three years. Starting next year, Telkom will forfeit R320-million from its allowable revenue increase over two years.
The utility hopes to raise R9-billion when it sells 20% of its equity and floats on the bourse.
“Telkom does not desperately need the money. Its gearing is tolerable and it has committed to capital expenditure,” says Di Silvestro.
The group’s debt-to-equity ratio, or gearing, was successfully brought down from 143 % to 122%. The utility has also committed R7,5-billion to capital expenditure, a third of which is allocated to the expansion of its cellphone subsidiary.
Icasa is processing applications for the second national operator. The operator will be 19% owned by a black economic empowerment consortium.
Eskom Enterprises and Transtel, telecommunications subsidiaries of Eskom and Transnet, will hold 30%. The remaining 51% will be awarded to what is hoped will be a private foreign partner.
Di Silvestro says that preliminary enquiries have not revealed any seriously interested parties.
The government now faces a huge problem with providing telephone services to outlying areas.
Sykes believes that one way of tackling this will be to provide more public telephones. The draft licence conditions for the second operator stipulate that it must deliver 15000 community service lines in the next 10 years. Telkom has delivered 133000 public telephone lines in the course of its monopoly.
This week Fatima Jakoet, general manger of Eskom Enterprises, reportedly expressed confidence in the consortium’s ability to meet this target.
Robert Nkuna, spokesperson for Minister of Posts, Telecommunications and Broadcasting Ivy Matsepe-Cassaburi, said this week that Telkom and the second operator could use limited-range wireless technology to deliver services in rural areas.
The communications ministry has also identified eight under-serviced regions with fewer than five phone connections for each 100 residents. Separately licensed smaller companies will service these lines.
Last Friday Eskom Enterprises said the state of world markets had forced it to revise its market growth expectations and profit margins down for its R2-billion investment with Transtel.
This week the transport and electricity utility subsidiaries expressed renewed confidence in the project and said they intended to garner the high end of the corporate market and deliver increasingly popular prepaid phone services to private residents.
The second national carrier is expected to be operational by the end of the year. Sykes says that with each passing month, Telkom captures corporate customers in long-term contracts and eats into the new operator’s potential market.
Number portability, the ability to switch service providers without changing phone numbers, is another small but important delay that could jeopardise the second operator.
The feature is expected to be available in April next year, but Sykes expects delays. “The second national operator will do well if given a chance. But how much of a chance it gets remains to be seen” she says.
The lower prices expected from competition are unlikely to benefit consumers, says Di Silvestro.
Before Telkom’s recent income rebalancing exercise, corporate clients subsidised residential customers. Telkom has now improved its ability to offer competitive pricing to the residential market, but its continued commitment to capital expenditure to enhance the communications network might well squeeze margins.
The second operator may struggle to pass on lower costs to entice residential customers from Telkom.
Another crucial area of potential competition is the delivery of enhanced services such as international calls and the Internet; where again the two operators will be fighting for the big bucks.
Nkuna says the government recently licensed Sentech, the state-owned signal distributor, to offer its infrastructure to help deliver long-distance telecom carrier and multimedia services. Sentech has already received requests for these services from abroad. The state will then provide services to the lower end of the market. Edunet will ensure that all public schools are wired to the outside world. The service will be funded by Universal Service Agency, a government agency that will be funded by the three cellphone operators, Telkom and the second national operator.
The government will also provide public access to the Internet and services such as e-mail at post offices. The service is expected to be used mostly by employment seekers and correspondence students.