Telkom’s 1 500% profit

Telkom’s billing structure allows for profit margins of up to 1 500% on some calls, according to a report asking for telecommunications reform.

The report, titled Reforming Tele-communications in South Africa: Twelve Steps for Lowering Costs and Improving Access, states that cellphone operators charge Telkom an interconnection fee to terminate a call on its network.

This charge is billed on a per second basis, while Telkom bills on a per minute basis for the first minute and in 30-second units thereafter.

The report uses the example of a five-second fixed-line-to-cellphone call, which would cost 12c in interconnection charges, but which Telkom bills at R1,89 for the full minute, yielding a margin of about 1 500%.

Author James Hodge, of Genesis Analytics, estimates that this billing structure inflates Telkom’s total-call revenue by up to 15%.

“A lack of competition and inadequate regulatory oversight have allowed Telkom to maintain a high price for its services,” says Hodge.

The report also points out that fixed-line-to-cellphone calls account for only 14% of call minutes made from Telkom phones, but because of their high pricing they account for 41% of all Telkom call revenues.

Hodge’s report was commissioned by the South Africa Foundation as a follow-up to its peer-group comparison report released in April, which highlighted South Africa’s excessive telecommunication costs.

The report is timely, considering the Department of Communications is about to host its second colloquium on telecommunications pricing next week as well as the ongoing debate about achieving a 6% growth rate in the South African economy.

High telecommunications costs have been identified by the government as a hindrance to job creation in the call-centre industry, where it is estimated that tens of thousands of jobs could be created.

Hodge says there had been a recent change in political will to do something about high telecommunication prices and that the colloquiums were a sign of this.

The report proposes 12 steps to be taken to lower communication costs, which include unbundling the local loop, regulating interconnection costs, regulating international bandwidth and the independence and funding of the communications regulator.

The report calls on Telkom to adopt a per second basis for billing and to offer a package with a flat monthly fee that includes free local calls.

It also calls on the Independent Communications Authority of South Africa (Icasa) to regulate the costs of Internet traffic on undersea cables — which are decided on by Telkom — and to force the interconnection fees of cellphone companies to be priced at cost.

The report says that these four steps could almost immediately result in a maximum 30% reduction in phone bills for most subscribers.

The report identifies interconnection costs as a major factor in high telecommunication prices in South Africa and says unless these are regulated — so that they are priced at cost — they will severely affect the competitive nature of the second national operator (SNO).

“Initially, and for many years to come, the SNO will have relatively few telephone subscribers in South Africa, which means that it will pay the interconnection rates on most of the calls its subscribers make. As such the interconnection rate will play a major role in determining the SNO’s call costs,” the report says.

It points out that unless interconnection rates are regulated Telkom could potentially disadvantage the SNO by charging high interconnection rates. It also singles out cellphone interconnection rates as excessively high, claiming they have risen by 48% (peak) and 60% (non-peak) over the past four years.

Only “major” or dominant operators are required to provide cost-based interconnection and to date none of South Africa’s cellular operators has been declared as such by Icasa.

With the delayed launch of the SNO, which will happen some time next year, there are a number of steps that can be taken to give it the best chance to compete with Telkom.

The report suggests that the SNO will require access to Telkom’s network of lines to offices and homes (known as unbundling the local loop) at cost-based prices.

It will also require landing rights for, and cost-based access to, the undersea cables controlled by Telkom.

The report calls on Icasa to declare the undersea cables as an essential facility and to set appropriate prices for bandwidth leasing. It says that with the cost of leased lines and international bandwidth, value-added network services (VANS) have to pay Telkom about 70% of their total costs, making it difficult to compete with the telecommunications giant.

South Africa Foundation’s peer-group comparison highlights the fact that internationally leased lines that allow businesses to transport data and voice communications outside South Africa are almost 400% more expensive than the average in 11 countries surveyed.

The report calls for a complete review of the universal-services policy, estimating that the 2,81-million new lines, which Telkom rolled out as part of its universal service obligations, were mostly disconnected because of high call costs totalling R17-billion.

The report calls for Icasa to be independent and free from potential political lobbying. However, this is in direct contrast to the new Icasa amendment Bill, which proposes removing the selection of Icasa councillors from the control of Parliament’s portfolio committee on communications and placing it under the control of the minister.

“The government remains conflicted as a shareholder in a few telecommunications operators [including the SNO], which makes it susceptible to acting in the interests of operators rather than of the public [which Icasa is mandated to do],” says the report.

The report calls for more funding for Icasa and says the regular loss of staff is a major problem that needs to be addressed as none of the team involved in the rate review was involved in the previous review of 2000/01.

Hodge says that the spectrum licence fees, which are paid by operators and used to fund the regulator, are excessive. He claims that MTN and Vodacom together paid in excess of R600-million, while Icasa’s total budget for last year was only R189-million.

Hodge says forcing operators to pay these high licence fees is contributing to high telecommunication costs.

An Icasa spokesperson said that the authority would not comment on the report until it had discussed it later in the week. Telkom spokesperson Lulu Letlape told the Mail & Guardian that it would provide a response to questions based on the report next week.

Proposed steps to lower costs and up access

Policy Directives

Regulatory Action:

Legislative and other changes