Falls in interconnect rates — the amount operators charge each other to use their networks — have not always led to reductions in the prices charged to customers, says the author of a new report from Balancing Act.
International expert Robert Hall believes from the evidence he has gathered in writing Setting Interconnection Prices in Africa that although interconnection negotiations should in the main be left to operators, retail price controls should play a larger part in Africa.
Over the past 10 years, most countries have opened up their telecommunications markets, and this wave is now sweeping through Africa. Today competition in the mobile telecommunications market is widespread in Africa, and increasingly competition is being introduced into the fixed telecommunications market — for example Nigeria in 2002, Kenya in 2004 and Tanzania in 2005.
With multiple operators providing networks, interconnection is essential so that customers on one network can communicate with customers on another network. Without this facility, it is impossible for new operators to start providing any service.
Interconnection is necessary for a competitive market, but the prices to be charged for the carriage of traffic from one operator’s network to another operator’s network have generated extensive negotiations and disputes in most countries around the world, including Africa.
A few 10ths of a cent in an interconnection rate (whose typical values are one United States cent a minute for calls terminating in the fixed network and 12 US cents for calls terminating in a mobile network) will make a big difference to costs and profits, so it is not surprising that operators will bargain hard over the actual numbers.
So, in theory, if interconnection costs are high, retail prices will be high, thus making telecommunications less affordable for many in Africa. Hence governments and national regulatory authorities responsible for the telecommunications industry are keen to see lower interconnection rates so that more citizens can benefit from telecommunications.
But, according to Hall: “The linkage between interconnection rates and retail prices seems weaker in Africa than in other countries, and additional regulatory controls on some retail prices may be necessary.”
In theory, a new entrant faces a choice of whether to build its own network or to use that provided by the incumbent operator. It makes this decision on the alternative costs, and interconnection rates are an important part of the calculations, along with the costs of leased lines, transmission links and other related costs.
If interconnection rates are lower than the costs of building out a network, the new entrant prefers to minimise its build and use the incumbent operator’s existing network. High interconnection rates will encourage it to increase its network build, thus satisfying government policies of promoting investment.
Furthermore, high interconnection rates will mean increased revenues for the incumbent, which can be reinvested in more network build — at least for the short term. In the longer term, as the new entrant builds out its network, it will divert more traffic on to its own network, thereby depriving the incumbent of interconnection revenues in the future.
But, as Hall notes: “Clearly interconnection rates are part of a complex pattern of investment incentives. Indeed governments may prefer to keep them higher in order to encourage investment, while incumbent operators may prefer to keep them lower in order to protect long term revenues.” — I-Net Bridge