The Congress of South African Trade Unions (Cosatu) lambasted Telkom as South Africa’s “worst company from a labour and consumer perspective”, after the utility announced bumper profits last week.
Cosatu economist Neva Makgetla complained that the utility had downsized its labour force by more than half since the mid-Nineties, “but they do it by stealth rather than in one go”.
Rubbing salt into labour’s wounds, Telkom said it would reduce staff numbers by 7% to 10% a year, shrinking the number of fixed-line staff to 28Â 000 from the current 32Â 358 over five years.
Telkom announced a 177% leap in net profit to R4,5-billion on a whopping R40,8-billion in revenue this week — a profit margin of 11%. Mike van den Bergh, chairperson of the Communication Users Association of South Africa, said margins of this magnitude are almost unheard of among telecommunications operators.
Any other company announcing profits on this scale would have been lionised for a job well done. But Telkom is no ordinary company. It enjoys monopoly power in key markets such as fixed-line services; counts the state among its major shareholders; and was supposed to be the flag carrier for the government’s programme to deliver telephone services to the masses.
It is on this last point that the utility has swung into reverse — the number of fixed lines contracted to 4,8-million from 4,9-million two years ago. The number of residential fixed line subscribers is now reckoned to be lower than it was when Telkom’s exclusivity period started in 1997.
A telecommunications performance review by the Link Centre at Wits University last year reckoned that 75% of the 2,7-million new lines that Telkom was to connect, in terms of its licence obligations, remained unconnected.
Price increases “way beyond what was anticipated” contributed to this, say the authors of the report, Alison Gillwald and Sean Kane: “As a result, while fixed-line growth is slowing internationally, South Africa is now one of a handful of countries worldwide with a declining fixed-line teledensity.”
Analysts say the success of the cellphone market, with about 18-million subscribers, is an indictment of Telkom’s high pricing. The Link study, released in August last year, found that local call charges had shot up nearly fivefold since 1996 to compensate for reductions in long-distance calls.
Makgetla pointed out that the success of the cellphone market was largely the result of the introduction of pre-paid services, which allowed users to manage their spending better. “Why has it taken so long to get pre-paid phones going in the fixed-line market?”
Telkom last week announced a 4,8% increase in the number of pre-paid customers to 856Â 000 versus a post-paid customer base of 3,1-million — down 4,6% on 2003.
Makgetla said Telkom’s management was hell-bent on matching performance benchmarks applied in industrialised countries. “These benchmarks are inappropriate for the local market. This shows that the new management [seconded from 30% shareholders SBC Communications and Telekom Malaysia] exert disproportionate influence on decision-making.”
Makgetla asked what the government was doing with its share in the company. “When it privatised a part of Telkom it put in place a developmental path that was very poorly defined. I think it is time for the government to take a stand.”
Democratic Alliance spokesperson on telecommunications Dene Smuts said there was no reason why phone charges should not drop radically next year in light of the 49% increase, to R6,4-billion, in Telkom’s operating profits from its fixed-line operation. Professor William Melody of the Link Centre calculated that phone tariffs should have dropped by 10% for 2003 and 15% for 2004.
Van den Bergh said the level of profits announced by the utility was a consequence of its cost-cutting drive and the absence of competition. “Telkom is in a beautiful position. It is a de facto monopoly whose network roll-out targets ended when it chose not to extend its exclusivity period. Yes, it succeeded in improving productivity to boost profitability, but without the pricing restraints imposed by competition.”
Brian Neilson, a director at BMI-TechKnowledge, said Telkom’s prices tended to be more competitive in areas such as Internet services and broadband, where there were alternative suppliers.
“But even so, local costs tend to be well above international levels. Broadband services such as Asymmetric Digital Subscriber Line (ADSL) in the United States and Canada are a fraction of the South African cost, in part because of the level of competition in these markets — and because of active intervention in the case of the Canadian government.”
In Canada, for example, broadband users pay about R220 a month for download speeds of up to 1,5 megabits per second (Mbps), or about R343 a month for speeds of up to 3Mbps.
“Compare this with South Africa, where one pays from R680 and upwards for an ADSL service, offering about a third to one-sixth of the bandwidth. As a result, nearly 40% of all Canadian households have residential broadband access,” Neilson said.
Business has long complained that telecommunications charges as a percentage of total overheads are far higher in South Africa than in other countries, and that this is discouraging foreign investment.
Charley Lewis, a telecommunications analyst at the Link Centre, adds that because of high call costs, many foreign call centre operators are unwilling to relocate to South Africa, despite the favourable time zone and relatively cheap labour.
Telkom no longer enjoys a statutory monopoly, and its price increases must be approved by the Independent Communications Authority of South Africa (Icasa). Prices are capped using a formula that compensates for inflation less 1,5% for productivity improvements. Icasa tried to raise the productivity deduction to 3% in 2001 as Telkom cashed in on 12% inflation to set its new tariff structure, but lost its showdown with Telkom and the government, which wanted to show good financial results ahead of Telkom’s listing last year.
Analysts believe windfall profits on this scale may be a thing of the past. Telkom faces potentially heavy penalties from the Competition Tribunal, which is investigating allegations of anti-competitive behaviour after the Competition Commission found that Telkom had “abused its dominant position by engaging in a pattern of anti-competitive practices” in the value-added network services market.
Meanwhile, the government finds itself under renewed pressure to expedite the licensing of the second network operator. Telkom expects to lose up to 15% of its market to the new operator, particularly in the government sector, and is planning to expand into Africa in search of new market opportunities.
Smuts said the Department of Communications revealed under questioning by Parliament’s communications committee last week that it was looking at the European system of setting a flat rate for Internet connection.
“This would be an excellent way of getting South Africa online and reducing costs for especially small- and medium-sized enterprises. But it cannot serve as an excuse for letting our unnatural fixed-line monopoly get away with high phone tariffs.”
Belinda Williams, head of investor relations at Telkom, said the group’s strong profit showing was the result of “a lot of hard work in improving efficiencies and paying down debt. If you look at our tariff increases at the end of the year, they were actually lower than stipulated.”
Stock market analysts lauded the improvement in Telkom’s efficiencies and some believe the profits will continue to roll in even after the second national operator commences operations.
“Overseas experience shows that it is very hard to unseat the incumbent operator,” said one analyst.