Cost to Communicate: update by Department of Communications & ICASA

NCOP Public Enterprises and Communication

30 July 2013
Chairperson: Ms M Themba (ANC)
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Meeting Summary

The Department of Communication and the Independent Communications Authority of South Africa (ICASA) met to discuss the high cost to communicate. Despite the high prices in the market, the communications sector was continuing to experience high levels of growth. However, the growth was primarily supported by medium to high-income groups, which was increasing the digital divide within society. Additionally, the high levels of growth were masking the associated challenges and problem areas within the market. The communications market was dominated primarily by Telkom and the mobile sector was dominated by Vodacom and MTN as the biggest operators with 91% of the market shared between the two. Despite South Africa having the largest economy on the African continent, a recent study showed South Africa was ranked 30th out of 46 African countries - making it one of the most expensive for prepaid mobile tariffs. Growth in revenue in the telecommunications sector went from R7 billion in 1992 to R100 billion in 2009. However, the Department said that growth has been masked by a number of unintended policy and regulatory outcomes which included:  
▪ Negligible fixed line growth
▪ High retail wholesale prices
▪ Widespread job losses in the sector
▪ Minimal new foreign direct investment
▪ Institutional inability to anticipate, regulate and mitigate the challenges
▪ Complex presentation of pricing information which led to lack of comprehension by consumers – so they cannot make an informed decision on pricing.

With regards to prices changes between 2010 and 2013, Vodacom showed a 28% price decrease, MTN had a 52% decrease and Cell C - with the highest percentage of price change - had a 60% decrease amongst the cheapest tariffs. As for the most expensive, there was little evident change: Vodacom with 9%, MTN with 10% and Cell C with no decrease. Despite the decreases in prices over the year, the cost to communicate remained extremely high. The Department was undertaking a number of measures to contribute to the lower cost to communicate:  
▪ Broadband Value Chain Analysis
▪ Policy Directive on Price Transparency
▪ Development of the ICT Indicators Portal
▪ Policy Directive on Premium Content
▪ Marginal Termination Rates.
Details about each of these measures were provided.

ICASA indicated that the cost of using pre-paid mobile phones in South Africa was “way above” that of most other African countries. ICASA said the high prices within the market were a direct result of high costs to the industry, which led to high costs to users to communicate. The cost to communicate in South Africa was too high and Icasa was taking steps to address this. The Cost to Communicate programme had been initiated, which included the following projects:
▪ Broadband Value Chain Study
▪ ICT Industry Indicators Collection
▪ Call Termination Market Review
▪ Local Loop Unbundling Regulations
▪ Wholesale.

In the discussion, the Select Committee members expressed extreme disappointment with ICASA for allowing cellphone companies to rip off the poor and for not playing its regulator role. They were frustrated with the lack of progress in sorting out prepaid mobile rates. They complained that the presentation did not provide sufficient information and requested more. They asked questions about whether legislation needed amending to improve  the status quo, if the work done on the Call Termination Regulation Project could be replicated in other areas, what were the challenges facing the implementation of the Cost To Communicate programme, and why had ICASA not put in place regulatory provisions in the past?

Meeting report

Department of Communications (DoC) presentation on Cost to Communicate
Mr Themba Phiri, DoC Deputy Director General: ICT Policy Development, began by noting that South Africa had the largest economy in Africa. However, a key issue amongst South Africans was the cost to communicate and the high prices within the communications market. The growth in the sector was primarily supported by the medium to high-income groups who were able to pay the high prices. The extremity of the prices to communicate was continuing to create a digital divide within society. Telkom who had an extensive infrastructure network around the country currently dominated the market as a whole. Likewise, the Mobile sector continued to have high prices with Vodacom and MTN as the biggest operators with 91% of the market shared between the two. The internet market was also characterized by high prices, which indicated a negative correlation of higher prices and lower access. The higher prices of broadband also contributed to low broadband penetration sitting around four percent. The high prices were evident at both retail and wholesale levels. In a recent study conducted, South Africa was ranked 30th out of 46 countries for the most expensive prepaid mobile charges among African countries.

Despite the high price challenge, the market was continually growing and demonstrated high profits. However, the growth was masking a series of ongoing challenges and unintended policy and regulatory outcomes, which included the following:
▪ Negligible fixed line growth – an international trend as it was evident amongst other markets
▪ High retail wholesale prices
▪ Widespread job losses in the sector
▪ Minimal new foreign direct investment
▪ Institutional inability to anticipate, regulate and mitigate the challenges
▪ Complex presentation of pricing information which led to lack of comprehension by consumers so they cannot make an informed decision on pricing.

Ms Adelaide Masemola, Director: Economic Analysis at the Department of Communications, provided an overview of the price changes in mobile tariffs between 2010 and 2013 (see document). The indicated prices were strictly representing pre-paid prices. The three main mobile operators, Vodacom, MTN and Cell C, were used to indicate the percentage of price changes of mobile call rated between March 2010 and March 2013 for both the cheapest as well the most expensive tariffs. Amongst the cheapest tariffs, Vodacom displayed a 28% price decrease, MTN with 52% decrease and Cell C with the highest percentage of price change with a 60% decrease. As for the most expensive, there was little evident change: Vodacom with 9%, MTN with 10% and Cell C with no decrease in prices at all. Despite the decreases in prices over the year, the cost to communicate remained to be extremely high. While some small operators offered more competitive prices, these operators only held 10% of the market share. Most importantly, the Department was highly advocating for the re-writing of pricing information into clear and simple format to enhance the understanding of all consumers.

Ms Masemola indicated that the Department was undertaking a number of measures to contribute to the lower cost to communicate. These measures included the following:
▪ Broadband Value Chain Analysis
▪ Policy Directive on Price Transparency
▪ Development of the IC indicator Portal
▪ Policy Directive on Premium Content
▪ Marginal Termination Rates
For timelines for these measures and details, see document.

With regards to the Broadband Value Chain Analysis, the Department was currently negotiating with the Independent Communications Authority of South Africa (ICASA) on how best to implement this policy. Its purpose was to analyse the broadband market to identify the challenges in the market and then propose potential remedies to market failures.

Mr Phiri continued the presentation speaking on the Policy Directive on Premium Content. Currently, there was evidence that indicated that content such as premier sports events and major movies was sold on an exclusive basis, which gave the TV provider obtaining these rights a strong competitive advantage in the in the pay TV sector that it could leverage into the traditional voice and broadband markets throught then bundling together of these markets. This had decreased the equal playing field for other providers. As such, the Department decided to issue a policy directive to ICASA to begin the market definition process that addressed the wholesale and retail market, in particular the lack of effective competition. Necessary corrective actions were to be quickly implemented from both policy and regulatory perspectives in order to reduce the cost to communicate in South Africa.

ICASA: 2014-2018 Cost to Communicate Programme
Dr Stephen Mncube, ICASA Chairperson, stated that ICASA was responsible for regulating both the South African telecommunications and broadcasting sectors in the public interest and policy and regulation initiatives were beginning to emerge more and more.

Mr Christian Mhlanga, Senior Manager: Markets and Competition at ICASA, stated that the issue at hand must be fully understood and placed into context. He provided a graph which indicated where South Africa’s prepaid prices stood compared to others in African. South Africa was far above the cheapest prices within the region. The high prices within the market were a direct result of high costs to the industry, which led to high costs to users to communicate (see document for detail). As a result, the Cost To Communicate Programme was initiated.

The goal of the Cost To Communicate Programme was to create public debate about the cost to communicate with hopes that the discussions would demonstrate where intervention was needed. The programme also set out to create an equal playing field by stimulating competition, leading to the protection of the consumer. The first step in the programme was a broadband value chain study that aimed to evaluate all cost elements and then allowed ICASA to effectively regulate prices where necessary. It would identify all the cost elements within a value chain by breaking down all the associated costs within that process of communication. The second step was an ICT indicators collection process, which aimed to collect industry statistics from all licensees. These statistics were to be used for policy process improvements.

ICASA indicated a 28% growth in traffic from June 2011 to December 2012 going from 19 billion minutes to 25 billion. This also led to an 11% increase in voice volume, a 14% increase in data revenue as well as a 1% increase in the number of employees with a 4% increase in the number of female employees. This 14% data revenue growth was a direct result of the introduction of smartphones into the market and currently, operators were working to produce affordable smartphones costing approximately R500.

The third step, Call Termination Market Review, referred to a multi-licence regime that allowed many players to compete among themselves and cooperate together.

At this point, complaints were voiced by the Members and the Chairperson about the documents handed out as they were missing several of the presentation slides.

Mr Z Mlenzana (COPE, Eastern Cape) stated that the missing information in the documents handed out was a deliberate barrier of communication and a form of information filtering.

The Chairperson decided that a five-minute break was in need in order to print out the proper documents. She explained to ICASA that the brief document that was originally provided to the Committee was not self-explanatory. As a Select Committee representing the provinces, these documents were not sufficient for use in reporting back to the Members' constituencies. The Chairperson urged ICASA to take the Select Committee more seriously.

The presentation resumed on the Call Termination Market Review. The call termination charge was an associated cost from carrying traffic from one operator another. As intervention, a process termed the Glide Path had been initiated. During this process, call termination regulation was designed to bring down costs. The first price cut reduced rates to 73 cents; the second cut brought the rate down to 56 cents and currently, the rate was sitting at 40 cents. More research was still required to analyse the current 40 cents rate and the research would determine if the price should be reduced further. The fourth step in the cost to communicate programme was the Local Loop Unbundling, which aimed at ensuring that access to the last mile [the local loop from the point of interconnect to the customer's happened in a non-discriminatory manner. Lastly, the Wholesale Transmission Services DTT Rate card was the fourth step. The DTT was to make sure that Sentech’s tariffs support the move to digital terrestrial television.

Discussion
The Chairperson expressed disappointment in the ICASA presentation and stated that it was insufficient nor did it meet the Committee's expectations. The Committee was expecting to receive more detailed information from ICASA, but nonetheless, she thanked ICASA and the Department for their presentations. For the current discussion, the Chairperson requested that the Department reply to questions and that ICASA return with more detailed responses.

Mr Mlenzana rhetorically asked about the mandate of ICASA: What was ICASA regulating? Why were similar measures as call termination regulation not taken to reduce other costs? Was there a piece of legislation that was holding back policy and regulation? This was a key concern of the Committee as they were legislators and not policy makers. Mr Mlenzana disagreed with ICASA about the increase of prices due to an increase in volume, as communication in South Africa was currently a need and no longer a luxury. He also wanted to put on record that very few of the decisions undertaken by ICASA were implemented and results were required to be seen before the termination of the Fourth Parliament.

Mr M Jacobs (ANC, Free State) stated that he represented those who were poor, which was the primary market for prepaid communication. Why did ICASA not put in place regulatory provisions in the past? Communication was to be accessible to all those on the ground. Ordinary people were using prepaid mobile communication and the poor were being ripped off by the high costs. Mr Jacobs was quite unhappy with the lack of implementation, as the issue of cost to communicate should have been addressed a long time ago.

Mr O De Beer (COPE, Western Cape) commented on the viability of the telecommunications sector based on the growth in revenue between 1992 and 2009 from R7 billion to R100 billion. What contributions did the small players make to the sector? Prepaid clients were predominately indigenous people; they were both clients and victims of the market. Additionally, the NCOP was required to be seen as a resource for ICASA to influence policy. If the challenges were regulation related, then a review of the legislation was required in order to manage the sector, otherwise, without a legislation change, polices would remain ineffective.

Mr Phiri replied that small operators (only 10% of the market) were dying because they were not able to compete. The major operators were dominating at an extreme rate.

Ms L Mabija (ANC, Limpopo) said he was a highly disappointed member of the NCOP because since the beginning of the fourth term of Parliament, there were ongoing problems with ICASA. Ms Mabija described ICASA as if ill with a certain form of cancer, which was causing the poor to suffer as a result. ICASA’s output was continually disappointing, yet they continued to receive their salaries.

Mr Prince Zulu (IFP, Kwazulu-Natal) requested the head of the Department and ICASA to look at the mandates and solve the issues.

The Chairperson told ICASA that the concerns that were raised in the last meeting should have served as guidelines for this meeting. None of the deadlines discussed were reflected in the current slides and the Committee was requesting what had been achieved in terms of the deadlines. What were the specific problems and challenges that ICASA was facing? Turning to the Department, the Chairperson asked what was being done to ensure that the deadlines would be met. The Cost To Communicate Programme was launched on 7 June and was deemed achievable; but now, progress was lacking. The Committee lacked the necessary information in order to maintain full support.

Mr Phiri replied to all the Members that the Department carried similar concerns and expressed similar sentiments with regards to the issues with ICASA. The Minister of Communication had met with ICASA and set aside a technical team to deal with a number of issues. ICASA was facing a number of technical and structural challenges; in particular, challenges with how they were funded and there was currently a legislative amendment underway to address the funding challenges. The Department was trying very hard to work with ICASA. When one looked at the projects run by ICASA, it was evident that they were in line with the Department and that much collaboration did exist. Both the Department and ICASA were facing skills challenges. In terms of legislation, Mr Phiri indicated that amendments were taking place that addressed some of the issues such as data services. The changes to legislation were to deal with broadband in greater detail. Prepaid tariffs that all the members were concerned about was a huge problem that had to be tackled. This was directly related to price transparency and the need to demonstrate to consumers the costs related to communication in order to inform decision-making. Price transparency would expose which carriers were providing the better prices.

The Chairperson reminded ICASA that they had some homework to do in order to meet the expectations of the Committee.

The meeting was adjourned. 

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