Indian lessons in busting cartels

South African mobile operators are charging up to 1 000% more than Indian mobile operators for a minute-long call.

A comparison by the Mail & Guardian between one of MTN’s standard pre-paid packages and Indian operator Reliance Mobile’s standard packages showed that mobile call rates in South Africa are exorbitantly overpriced.

A one-minute call on Reliance Mobile costs the equivalent of 20c, while the same call on MTN’s network costs R1,99.

India has one of the most deregulated telecoms sectors in the world, where key bottlenecks such as interconnect fees have been regulated.

The Indian market is of particular interest to South Africa as its regulator has managed to turn around a sector that had limited competition, high government involvement and high costs, which is similar to the state of South Africa’s telecoms sector.

The current interconnect regime in South Africa is heavily skewed in favour of the two big players, Vodacom and MTN, with MTN South Africa raking in R1,7-billion in profit from interconnect revenue in 2006. This equates to 20% of MTN South Africa’s pre-tax profit for the 2006 financial year and contributes to the fact that MTN is far more profitable than Indian operators such as Reliance.

MTN’s profit margin for the 2006 year was 31%, compared with Reliance Mobile’s profit margin of 21%.

Interconnect fees are the rate that one telecommunications operator charges another operator to terminate a call on their network — for example, what MTN would have to pay Vodacom if one of its subscribers called a Vodacom customer. The current interconnect fee in South Africa is R1,25 per call, while in India it has been regulated down to 20c.

South African interconnect fees used to be 20c in 1994, but were increased by Vodacom and MTN to R1,25 shortly before Cell C entered the market.

South African interconnect fees are among the highest on the African continent, coming in third in a sample of 21 countries. While South Africans are paying R1,25, the Senegalese are paying just 21c.

Interconnect is seen as the biggest bottleneck to stimulating competition in the South African mobile market. If Interconnect was regulated to a cost-based fee, it would allow operators more scope to undercut each other on call rates, creating greater competition.

The Independent Communications Authority of South Africa (Icasa) is expected to publish final regulations for interconnection by the end of the month. But it is still unclear what pricing model will be used to determine the new, regulated interconnect fee, and most analysts are doubtful that the regulator will sort out the interconnect regime anytime soon.

“Icasa has a lot of tough questions to answer about why this process has taken so much time,” said an analyst who refused to be named.

Genesis Analytics have estimated that mobile calls could be slashed by up to 30% if Icasa wins its battle to regulate interconnect fees.

Another analyst said evidence suggests that regulating interconnection to a cost-related charge in other countries has reduced call charges by between 40% and 80%.

“The mobile operators have made no secret about the fact that they make a lot of profit from interconnect,” said an industry insider who did not want to be named.

Another analyst who did not want to be named said that the 635% increase in interconnect fees between 1999 and 2001 was aimed at making life difficult for the new entrant, Cell C.

“Basically, you have Vodacom and MTN behaving like a cartel to protect their revenue streams at the expense of the consumer in a period when there was a lack of regulation,” said the analyst.

“The current interconnect fee is an inflated figure that has been put there as a barrier to entry. Let’s say that interconnect should be 50c, then the consumer is paying 70c more on every call that leaves their network, and based on that, the two big mobile companies are making billions of rands in profit. It’s nonsense.”

MTN’s latest annual report shows that in South Africa the mobile giant raked in R5,6-billion in interconnect revenue and paid out R3,9-billion in interconnect revenue and roaming costs. That is R1,7-billion in profit from the interconnect regime, which is 20% of MTN South Africa’s pre-tax profit of R8,3-billion.

Cell C’s Nadia Bulbulia said the current interconnect regime severely disadvantages the mobile operator because 80% of its calls are to other networks. She said Cell C would welcome a cost-based interconnect regime and that it is just looking for fairness and a level playing field.

India’s regulation success story

Icasa could learn a thing or two from India’s telecoms regulator, who now presides over one of the most liberalised telecoms sectors in the world.

India is among the top-five largest markets in terms of cellphone subscribers and is expected to be second only to China by 2010.

A report, titled Wireless Communications in India, prepared by research firm iSuppli, says that the drivers of growth in India’s mobile sector are the aggressive use of wireless technology, falling call rates and its favourable regulatory climate.

The Telecom Regulatory Authority of India (Trai) was only set up in 1997, but the groundwork for liberalisation of the telecoms sector really began in 1994.

In 1994, the Indian government released its National Telecommunications Policy, which allowed private fixed-line operators to get into the market for the first time. Its policy divided the country into 20 regions, each of which would have two licensed mobile operators and two licensed fixed-line operators.

But growing regulatory uncertainty and the failure of some new entrants did not produce the desired results of greater competition, leading to the setting up of Trai in 1997.

In the early years Trai had to deal with political interference and challenges to its authority by major private players. But from 2000 onward Trai came into its own, implementing key regulations that would stimulate competition in the sector.