Convergence Bill hearings: submissions by Vodacom, MTN & Cell-C

Meeting report

COMMUNICATIONS PORTFOLIO COMMITTEE
21 June 2005
CONVERGENCE BILL HEARINGS: SUBMISSIONS BY VODACOM, MTN & CELL-C

Acting Chairperson:

Vodacom Presentation on Convergence Bill
Vodacom’s Key Concerns with Convergence Bill
Vodacom Submission on Convergence Bill
MTN Presentation on Convergence Bill
MTN Submission on Convergence Bill
Cell-C Presentation on Convergence Bill
Cell-C submission on Convergence Bill

SUMMARY
Vodacom, MTN, and Cell-C presented their concerns and comments on the Convergence Bill to the Committee. Common concerns included the role of the Minister and the Independent Communications Authority of South Africa (ICASA), licence conversion, and the importance of competition in lowering prices and expanding access. Vodacom’s presentation emphasised the importance of foreign investment in maintaining and expanding the telecommunications infrastructure, while the answers included an explanation of the role and importance of capitalism in the telecommunications industry. Major issues raised by MTN included the determination of significant market power (SMP) and the ICASA responses to SMP and the role of infrastructure. Cell-C highlighted the issue of South Africa becoming a technological dumping ground, the lack of procedural safeguards, and the role of the Universal Service Fund. Questions raised by Members focused on contributions to the USF, the proper role of regulation in relation to SMP, and specific issues relating to mobile operators’ business practices.

MINUTES
Vodacom submission
Mr Alan Knott-Craig, CEO of Vodacom, addressed several issues pertaining to the Convergence Bill, emphasising the need to ensure private investment continued. Additionally, Mr Knott-Craig stated that cheaper prices, as well as increased teledensity and subscriber numbers resulted from competition rather than regulation. The Convergence Bill had to keep in mind the societal goals of increased penetration, continued competition to foster innovation and lower prices, and continued long-term private investment. He also mentioned the cautionary tale of Malaysia, with unprofitable licencees, low rates of private investment, and more expensive telecommunications prices. He contrasted the confusion of the Convergence Bill with the drafting of the Telecommunications Act of 1996, which had a clear licence framework, known licence terms and conditions, regulatory intervention and price regulation only in markets with little or no competition, and due, proper, and transparent process. Suggested changes to the Convergence Bill included the grandfathering of old licence rights and obligations, preventing a licencee from having to pay multiple sets of fees for multiple licences, adding a due process to the addition of more licence obligations by ICASA, decreasing the heavy-handedness of the regulations, and placing issues of competitiveness within the jurisdiction of the Competition Commission (CC). If these recommendations were not adopted, there would be less sustained competition within the industry, less investment, no investments into infrastructure made by competitors, and the deterioration of the existing infrastructure. Additionally, Mr Knott-Craig asserted that dominance in itself was not detrimental to the market or the country, but rather the abuse of dominance.

MTN submission
MTN’s comments and concerns were jointly presented by Maanda Manyatshe, Managing Director, Kammy Waidio, Moses Mashisane, Graham de Vries, Legal and Regulatory Advisor, and Elize van der Walt. MTN desired the Convergence Bill to create a more liberalised market than the tightly regulated one envisioned in the Bill, which would then encourage investment in extending access and connecting more people at a fair price. The current regulatory environment of the Bill encouraged less investment in infrastructure and lower prices for those already connected rather than more access, as well as no protection for existing rights of licencees. MTN echoed Vodacom’s statement that competition was doing a good job at ensuring coverage and lower prices. Additionally, the telecommunications infrastructure was falsely classified as a scarce resource, when in reality it was only scare because very few infrastructure licences had been issued. MTN concurred with past presenters that the policy framework was inadequate, and that a Green and White Paper process should be done to redress this lack. Moreover, the Bill treated significant market power (SMP) the same as a monopoly situation after an arbitrary threshold of market share was reached, when it should be based on market analysis on sound guidelines and treated flexibly. Similarly, cost-based facilities leasing and interconnection should only be required in the case of a monopoly, lest it result in less infrastructure investment, lower penetration, and higher prices. Lastly, it was very unclear what the amended licences would look like, and the awarding of licences was subject to the influence of the Ministers.

Cell-C submission
Mr Talaat Laham, Chairman and CEO, Mr Karabo Motlana, Head of Regulatory Affairs, and Ms Mandla Msimang, Senior Manager for Regulatory Affairs outlined Cell-C’s major concerns with and suggestions for the Convergence Bill. Major problems with the Bill included an unclear and incomplete policy framework, and the lack of the ICASA Amendment Act, which was necessary to fully understand the Bill. Other concerns included the separation of powers between the Minister and ICASA, and the lack of procedural safeguards. There were also definitional problems with licensing framework. The conversion of existing licences needed to be done in a stable and predictable manner, retaining rights and preventing ‘double jeopardy’ of fees in order to ensure continued investment. Additionally, the management of technology, the balance between regulation and competition, spectrum management and the requirement of interconnection or facilities leasing at cost were concerns. Specific suggestions included guidelines for defining and regulating SMP, and making clear the difference between significant market power, which should be the target of ex-ante regulation by ICASA, and dominance and misuse of dominance, which would require ex-post facto action by the Competition Commission. Finally, number portability ought to be phased in, the role of the Universal Service Agency should be re-examined in a converged environment, portions of the Telecommunications Act which were left out of the Bill ought to be carried over, and additional procedural safeguards ought to be inserted.

Discussion
The Chair asked the Department to speak to the issues of the retention of existing licence rights, the class licences, and the omitted Section 54 of the Telecommunications Act of 1996.

Dr P Mulder (FF+) asked Cell-C about their comments regarding the management of the finite radio spectrum, and why the allocation of frequencies should not be first-come, first-served. Additionally, how would digital radio affect licensing?

Mr Knott-Craig responded that as all wireless relies on the limited radio spectrum, it had to be allocated sensibly. Therefore, it made sense to reserve a portion of the spectrum for later entrants.

A presenter from Cell-C agreed that the spectrum should be managed efficiently, and also noted that the point of the individual licences was to ensure fair access to scarce resources. While digital media reduced the need for spectrum, this was not immediately applicable to wireless communication.

Mr R Molalonga (ANC) was concerned about the increasing amount of spam and pornography available on cell phones, with no age restrictions.

Mr Knott-Craig stated that to receive pornography on one’s phone the consumer had to choose to receive it and choose to view it. However, Vodacom was nearly finished building a system whereby parents could block their children’s phone from receiving unwanted images.

Mr Molalonga asked Vodacom why they sent or advertised pornography.

Mr Knott-Craig replied that Vodacom as a company did not send any content, it simply allowed other people to use their network to send content, but what they sent was up to them.

A presenter from MTN added that if a "please call me" led to a message for pornographic material, the owner of the cell phone still had to look at it. The viewing of pornographic material ought to be a free choice, not a flood on one’s phone.

Additionally, Mr Molalonga asked whether Vodacom was saying that the Convergence Bill was not necessary and they did not seem to be offering any forward-looking suggestions.

Mr Knott-Craig replied that Vodacom did not say that the Bill was unnecessary, but rather that it could be more helpful, particularly around their three areas of concern, in which they had provided specific proposed amendments. However, it was a bad idea to introduce legislation that would stop capital expenditure (capex) investment in South Africa. To maintain investment; an environment of predictable, suitable returns was required.

Mr Molalonga asked Cell-C to speak to their concern regarding the conflation of regulation of policy and regulation. Finally, he was concerned about the maintenance of private investment and that there were so many unresolved issues with the Bill when they had been working on it since 2003.

The Chair noted that any static market, whether monopoly, duopoly, or triopoly, was bad for the industry.

MTN replied that when they argued that the existing agreements of the cell phone providers with the government should be maintained, it did not mean that they were advocating a triopoly. Rather, MTN meant only that the old licences needed to be respected. MTN had not commented regarding preventing new entrants. The intent was to respect current licences, rather than to preserve the current triopoly.

Mr K M Khumalo (ANC) asked Vodacom what terms would be favourable to ensure that their old rights were maintained after the Bill was enacted. Additionally, would the self-regulation and free competition proposed by Vodacom lead to abuse and eventually require ex-post action?

Mr Knott-Craig stated that the CC should examine issues of SMP and competition, and particularly if there was a dominant player, whether they were abusing their dominance. He asserted that it would be contrary to capitalism to punish a company simply for being successful. He added that, regarding self-regulation, it was true that the cell phone companies had received favourable interconnection rates. However, these rates should not be imposed unilaterally, but rather people should reach an agreement as to the tariffs.

A presenter from Cell-C agreed that dominance and abuse of dominance would be a better determinant of when to apply additional regulation or obligations, not simply SMP. This should be determined by standard global assessment tools.

Mr Khumalo asked MTN about their reference to legal barriers to investment, and asked them to explain the barriers, and what limits on foreign ownership they would propose. Additionally, MTN should explain the contrast between their Keynesian vision of liberalisation versus regulation.

MTN replied that the legal barriers to investment were the over-regulation, which would make the telecommunications landscape too confusing and complicated to attract foreign investment. Since the current system was working, there was no need to over-regulate.

Mr Khumalo also noted that the Minister was issuing licences, not ICASA, and that they would have to resolve the issue of SMP eventually.

A presenter from Cell-C stated that it was necessary to delineate the policy and regulatory responsibilities of the Minister and ICASA, respectively.

A presenter from MTN noted that the issue of SMP was problematic, as currently the company deemed to have SMP could be forced to provide facilities at cost to their competitors, which could lead to deliberate manipulation of market-share in order to avoid being termed a company with SMP. The Bill needed to be more responsible to the issues of SMP versus dominance, as the current provisions for interconnection and facilities leasing allow players to piggyback on their competitor’s infrastructure. This would be contrary to the country’s goals, as there was a need to develop infrastructure, access to telephony, and jobs. Furthermore, there was agreement among the sector that a player should not be required to provide access to essential facilities at cost. Rather, an assortment of remedies would be possible if an abuse of dominance was found to exist based on an examination of the market.

Mr Khumalo asked Cell-C for their views on SMP and the Universal Service Fund (USF), the place of ex-ante versus ex-post regulation, compared with the necessity of allowing new entrants into the market.

Mr Khumalo also challenged the common objection to ‘double jeopardy’ and the objection to funding competitors, as the money from the USF goes to fund under-serviced people, not competitors.

Mr Knott-Craig responded that Vodacom objected to ‘double jeopardy’ as licencees should not be charged more than once if now multiple licences were required under the Convergence Bill.

Ms M Smuts (DA) asked Vodacom and the Department to comment on the issue of ‘surrendering’ licences, agreeing that past agreements had to be honoured and no open-ended obligations could be imposed to ensure investor confidence. Regarding the USF, the Department was lacking a clear policy on its disbursement, and therefore it would be unfair to increase player’s USF obligations. As Cell-C noted, the ICASA standing regulations must be carried over during the transition period.

Mr Knott-Craig responded that Vodacom was fine with the conversion to new licences, but their concern was with the imposition of new obligations, particularly as this was a power of the Minister rather than ICASA. Additionally, although the point of capitalism was to make a profit, the government imperatives must be met. However, the imperative of access was being met by competition. It would be more sensible if regulation was imposed if the government requirements were not met. For example, if 80% penetration were not achieved via competition, then the government would impose regulations.

Ms Smuts also brought up the licence conversions in Malaysia, where existing licencees were allowed 12 months in which to convert their licences. Those who applied for new licences received new rights and possible new obligations, while those who did not, retained their old licences until they expired. As all companies would want to register for the new rights, this method would allay the fear of those who do not want to ‘surrender’ their old licences. She asked for comment by Vodacom and the Department.

Mr Knott-Craig replied that in Malaysia, there were benefits to acquiring the new licences, but currently, there were no carrots or benefits attached to the new licences.

Ms Smuts acknowledged the social benefits of cell phones, but questioned the high profits in the industry. She questioned Vodacom’s argument that affordability should be measured by penetration, as the termination rates were very high. Were the costs of issuing free handsets or potential laptops to get new subscribers recovered by instituting higher tariffs? Currently ICASA had the power to examine tariffs in the interest of consumers, but it was unclear who would have the power to examine a similar issue under the Bill?

Mr Knott-Craig answered that ICASA does have a role to play in keeping price increases below the rate of inflation, but that competition was more effective in lowering prices than regulation, although the possibility of regulation was a necessary safeguard. The handset subsidies had been crucial to increasing subscription numbers, and it was not ICASA’s business to dictate business models, as this one had worked. The monthly prices of contract and pre-paid were the same, but the new phones contract customers receive every 18 months result in a trickle-down of the old phones, which end up in the pre-paid sector. This recycling of old phones increased the general accessibility of cell phones, key to the current number of 14 million subscribers, as opposed to the likely 400 000 without the recycling of phones. Vodacom was not yet considering providing free or subsidised PCs to increase the number of Internet subscribers, as they needed to get someone else to shoulder the considerable risk. He asserted that a successful business model should not be tampered with, and that one should not scratch where there is no itch.

A presenter from MTN agreed that the subsidisation of handsets and the implementation of pre-paid had greatly increased the number of cell phone users. Although the pricing implications might have been a bit of a problem, the subsidisation had contributed greatly to the accessibility of mobile phones.

Ms Smuts replied that the high termination rates did itch.

Mr Knott-Craig stated that he did not know if the termination rates were unnecessarily high, but they needed to be symmetrical. However, companies could not be punished for being cost-effective by having lower termination fees paid to them.

The Chair asked for comment on the issue of number portability within the restrictions of a contract.

The Chair noted that there was consumer suspicion regarding Vodacom’s high profitability.

Mr Knott-Craig responded that no one suspected companies when they were unprofitable, and that the suspicion started when the company becomes profitable, even though the whole point of capitalism was to make money.

Mr R Pieterse joked that the problem with porn on cell phones was the poor resolution. On a more serious note, he added that those who objected to pornography could stay away from it. He also noted that Chapter 4 of the Bill, on the rapid deployment of communications facilities, intended to put services in rural areas, was uncommented on. He stated that when a client does not pay an account, the account must be closed, and that every industry needed a dominant player. Furthermore, competition was working, as Cell-C was gaining market share, and asked whether this argument was still relevant in a market with a Second National Operator (SNO). Regarding the co-jurisdiction of the CC and ICASA, he asked if ICASA could refer competition matters to the CC.

Mr Knott-Craig answered that there was no reason the SNO should pay lower termination rates.

Ms S C Vos (IFP) asked the Department to comment on Cell-C’s concern about equipment standards and technology dumping, particularly why Section 100, dealing with enforcement, was lacking in the Bill.

Mr Mjwara (Deputy Director-General of the Department of Communication) replied that the section was in the forthcoming ICASA Amendment Act.

Ms Vos also spoke to the common concern about infrastructure piggybacking. Although the Bill was designed to help new entrants, particularly Black Economic Empowerment entrants, there was the need to consider the long-term effects on the infrastructure and consumer interests.

Ms Vos also asked why Vodacom wanted the CC to have sole jurisdiction over competition concerns, and asked if they lacked confidence in the competence and capacity of ICASA.

Mr Knott-Craig replied that it was fine for ICASA to refer competition matters to the CC, as long as the most competent body handled the issue. At this time CC was the most competent.

Ms Vos asked who would do the market analysis to determine SMP if an economic analysis replaced threshold determination of SMP. She was also concerned about the high Internet prices in South Africa, following the Yankee Report.

Mr Knott-Craig responded that the SMP analysis must be done within a reasonable timeframe, but thorough enough so that an informed decision could be made. The most important factor regarding the SMP analysis was to inform the players about the decision, as the decision would affect the finances of the players. He continued that the Internet in South Africa was expensive because of the Telkom monopoly. Additionally, the high cost of hardware was a barrier to entry. A market must be created to start the industry, perhaps by subsidising PCs.

A presenter from Cell-C agreed that SMP must be determined by a sector specific market analysis.

The Chair asked MTN to respond to their assertion that the current Bill would promote infrastructure cherry picking and discourage infrastructure growth, and how to circumvent that problem while supporting new entrants. This argument had also been used regarding the unbundling of the local loop.

The Chair also asked the Department when the ICASA Amendment Bill was due.

Mr Mjwara responded that it was due the next day to be presented to Cabinet, and that if it was approved, the ICASA Amendment Bill would be introduced in Parliament after the July recess.

Ms Vos asked for a list of dates regarding the finalisation of the Bill, as the Committee could not be expected to finish the Bill without seeing the ICASA Amendment Bill.

Mr G Oliphant (ANC) agreed that the Bill should not limit existing rights, but that all players must adjust to the converged reality. This was difficult, as the Bill must balance national interests with the interests of investors and consumers. Additionally, the ICASA Amendment Bill must speak to the procedures of the Minister and ICASA, and asked if there was any general problem with the objectives of the Bill.

Mr Oliphant asked if the objection to the increase in USF fees from 0,5% to 1% was based on the unclear policy or was a financial issue.

Mr Knott-Craig replied that Vodacom’s opposition to the increase in USF contributions was based on principle, as the terms of the existing agreement should not be changed. However, if there was a compelling reason to increase the USF contribution, they could agree, however, it was currently unclear how the USF was helping to increase access.

A presenter from Cell-C responded that Cell-C wanted to know exactly what the USF was doing to extend access and how, as there might be other, more efficient ways of helping extend access to underserved areas.

Mr Oliphant concurred that pornography was a real issue with cell phones, and asked Vodacom when their parental blocking system would be finished.

Mr Knott-Craig answered that the system would be rolled out in October 2005.

Mr Oliphant asked Cell-C why they proposed changing the transition period to 36 months from 12 months, and asked if their purpose was to extend the status quo or a genuine concern regarding the capacity of ICASA.

A presenter from Cell-C replied that the transition period should be 36 months as it would be a complex process, and that there needed to be adequate time for due process. Furthermore, ICASA lacked the appropriate capacity to complete the process within 12 months.

Mr Oliphant also asked what the jurisdiction of the CC and ICASA should be, about the abundance of scarce facilities and why there was a complaint about a lack of policy process when the process began in 2003. Additionally, he asked Cell-C to clarify their statements regarding technology neutrality, and MTN regarding their views on social cohesion.

A presenter from MTN replied that a weakness of the Bill was that it treated the mobile market the same as the monopolistic fixed line market, and applies monopolistic regulations to a non-monopoly market sector. In the mobile market, the access price should be determined by the market, as competition had been effective. Regulation should only be used when competition was not benefiting the consumers. Although price regulation was in the purview of ICASA, the Committee must differentiate between ex-ante and ex-post regulation. Social cohesion would be enhanced by the availability of cheap telecommunications facilities, which the mobile industry had helped to make available. The lack of a clear policy was troubling, as the Convergence Bill was a major policy shift, and as such needed a clear policy framework.

A presenter from Cell-C added that the principle of technology management was to ensure that South Africa does not become a dumping ground for obsolete technology. Additionally, the environmental impact of the technology must be considered.

Ms L Yengeni (ANC) commented that Sentech had appealed to be allowed to access clients directly, as they were giving mobile operators huge discounts which were not being passed on to consumers.

Mr Knott-Craig responded that Vodacom did reduce tariffs when their international costs decreased. When their three earth stations were finished, Vodacom would be able to carry their own international calls, resulting in a significant drop in tariffs.

Ms Yengeni stated that the role of ICASA was over-emphasised and in many presentations, the Minister was described as interfering. She asked Cell-C to give an example of the role confusion and lack of procedural safeguards they referred to in their presentation.

A presenter from Cell-C replied that due process was necessary to make sure that licencees were included in the conversion of licences, as the current framework was inadequate. Additionally, the roles of the Minister and ICASA needed to be made explicit. For example, the Minister was currently responsible for spectrum allocation and assignment. Classically, the Minister would formulate spectrum policy, while ICASA would do the specific assignment.

Mr Joe Mjwara, Deputy Director-General from the Department of Communications, replied that all players must eventually get a new licence, although the specific timeframe of the conversion framework could be examined. The current Bill was specific that ICASA will determine the specific process for licence conversion. Regarding the Malaysian model, there were two major lessons to be learned. The new amended licences would be attractive to the players, as they will have more rights than the old licences. On the topic of "managed liberalisation," the network would be regulated separately from services, as outlined in the principle of regulating infrastructure separately from content. He asserted ICASA’s right to intervene in the market, as although the market was powerful, it did not always have favourable outcomes. Cell phone technology had not been discussed, as in the converged environment; there would not be the old licence categories of mobile operators, etc.

Another Department official added that the enforcement section of the Telecommunications Act would be in the ICASA Amendment Bill, and that sections 35, 36, and 54 of the Telecommunications Act were included in Chapter 6 of the Convergence Bill. A class licence would be similar to the current class licences, which must be applied for. The licensing scheme would largely still be retained, in order to achieve the objectives of the Bill.

The meeting was adjourned.