South Africa mobile providers yield to political pressure

After sustained pressure from political leaders, South Africa's leading mobile service providers MTN and Vodacom have entered into an agreement to lower the cost of interconnection.

The two companies thrashed out an agreement of interconnection rate of 78 South African cents (US$.01), which declines to 61 cents year-on-year for the next three years. The interconnection rate, which forced the government to act, is currently fixed at 1.25 rand per minute during peak times.

The bilateral negotiations took place after the Independent Communications Authority of South Africa (ICASA), which has oversight over the process, issued regulations on interconnection.

The interconnection debate was preceded by a benchmarking study that compared the costs of interconnection in South Africa with Chile, South Korea, India, Brazil and Malaysia for both fixed and mobile telecoms, as well as the associated Internet usage and costs.

Armed with the study, the Department of Communication put pressure on the providers and got support from Parliament, and service provider executives were summoned to parliamentary hearings to defend their tariffs.

South Africa follows in the steps of Kenya, Tanzania, Botswana and Nigeria in setting interconnection tariffs, but it is the first to involve politicians.

"The danger is that the matter of mobile termination rate reduction is approached haphazardly. This is not the best example of how to deal with interconnection rates," said Dobek Pater, senior telecoms analyst at Africa Analysis.

The South African case is likely to be replicated in other African countries where ICT policies do not exist, but political leaders are very strong.

"Regulators view interconnection rates as a means of reducing tariffs or the cost of telecommunications. We can expect this process to unfold in all jurisdictions in Africa where it has not yet taken place," added Pater.

African mobile service providers have been enjoying huge profit margins, but that is likely to change as more countries look into ways to lower costs and allow more low-income earners to access services. The reduction can also result in healthy competition or price wars.

"High-termination costs tend to favor the bigger players and stifle competition, while regulated interconnection fees allow smaller companies to compete based on quality of service, which makes the market more competitive and helps reduce a monopoly structure," said Stone Atwine, managing director of BlissOne Media in Uganda.

In South Africa, Cell C, the third largest player, has been reluctant to enter into an agreement with MTN and Vodacom, which both control a large segment of the market and are in stiff competition.

Outright price wars are not necessarily good for the market -- healthy competition will result in a degree of price competition as well, but companies will offer more bundled services to provide greater value to the users, said Africa Analysis's Pater.

However, high interconnection rates are not the only challenge faced by African consumers. Power shortages that increase costs through investments in alternative energy and taxation have also played a major role.

"Some African governments have very poor taxation policies that tend to push costs higher. In Uganda, there's a high excise duty of 12 percent imposed on mobile phone services on top of other taxes," said Atwine.

The Communications Commission of Kenya conducted a study five years ago in that nation and set a time frame and a time table for Safaricom and Celtel to follow.

"That study forced Safaricom to reduce costs because it was not responding to calls for price cuts from their then-competitor Celtel. The regulator had to step in and fix the termination costs," said John Walubengo acting dean at the Multimedia University in Kenya.

Although the cost of calls in Africa may be higher compared to economic capabilities of most residents, the operational and capital expenditure is also high because most countries do not offer tax incentives for telecoms companies on equipment and other capital expenditure.