Ms Pinky Moholi: Managing Director, Telkom South Africa

PARLIAMENTARY PRESENTATION ON MEASURES TO REDUCE HIGH INTERCONNECTION RATES

AND HIGH COSTS OF TELECOMMUNICATIONS IN SOUTH AFRICA

Ms Pinky Moholi: Managing Director, Telkom South Africa

Dr Andrew Barendse: Group Executive: Regulatory Affairs, Telkom

Mr Thamsanqa Kekana: Senior Legal Advisor: Regulatory Affairs, Telkom

Introduction

• Telkom welcomes the opportunity to provide comments on the Resolution passed by the Committee on 15th September 2009.

• It must be noted that the current intervention is directed towards MTR’s and thus strictly speaking outside of Telkom’s purview.

• Notwithstanding, Telkom as the fixed line incumbent is affected in the following way

• Most fixed-to-mobile calls originates from Telkom’s network.

• Large revenues are transferred from Telkom to MCO’s in the form of termination rates.

• MCO’s have been able to subsidize retail mobile services which has encouraged substitution of fixed for mobile calls.

• This has contributed to a decline in fixed traffic.

Key messages

The impact of lower termination rates on Telkom’s business11

Telkom’s understanding of the applicable legislative framework for the regulation of termination rates

13

The termination rates of Telkom payphones12

Concluding comments14

2008R million

2009R million

5,460 5,432Payments to mobile operators

As ofJanuary 1,

2008

As ofJanuary 1,

2009

Peakrates (1)

Off peak rates(2)

Peakrates (1)

Off peakrates(2)

Termination rate paid to mobile operators 1.25 0.77 1.25 0.77Notes:•Monday to Friday 7 a.m. to 8 p.m.•Monday to Thursday 8 p.m. to 7 a.m. the next morning and Friday 8 p.m. to Monday 7 a.m.

Telkom’s current interconnect out-payments

(ZAR, excluding value-added tax)

How much did Telkom pay to cellular operators for interconnection fees in the past two financial years?

11

In reply to a parliamentary question dated 21 August 2009

2008R million

2009R million

838 916Interconnection revenue from mobile operators

As ofJanuary 1,

2008

As ofJanuary 1,

2009Peak

rates (1)

Off peak rates(2)

Peakrates (1)

Off peakrates(2)

Termination rate paid to Telkom 0.29 0.16 0.29 0.16

How much did Telkom receive from cellular operators for interconnection fees in the past two financial years:

(ZAR, excluding value-added tax)

Telkom’s current interconnect out-payments11

Net interconnect with MCO’s: 4,622 (2008), 4,516 (2009) respectively

General comments

Impact presumed to be positive – yet not clear what the full implications for Telkom will be.

• With regards to the transfer of revenues from Telkom to MCO’s

• Lower mobile termination rates may result in lower payments to MCO’s but may also result in lower payments from MCO’s

• With regards to the substitution of fixed for mobile calls

• Lower mobile termination rates may lower subsidization of retail mobile services which in turn may limit the substitution of fixed network calls by mobile calls

• With regards to the decline in fixed-to-mobile traffic

• Lower mobile termination rates may limit dramatic decline in fixed traffic

11

Key messages

The impact of lower termination rates on Telkom business11



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General comments

• Telkom provides some 125,288 public payphones in the form of fixed payphones as part of its universal service obligations in terms of its 1997 licence.

• Payphones serve a vital role for those unconnected persons who require affordable retail rates.

• There exists enormous disparities between Telkom’s public payphones and the Community Service Telephones (CST’s) provided by the MCO’s.

– For calls from Telkom’s public payphones to mobile numbers Telkom pays the mobile operators R1.25 per minute (peak time) as the termination charge.

– Mobile operators charge each other R0.06 per minute to terminate calls from CSTs to mobile numbers.

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Cell 120k CST’s , Vodacom 133.7k CST’s, MTN 14.7k CST’s

(ICASA annual report 2007/8)

Slide 9

Payphones as a license obligation

PSTS Licence (Condition 4.2)

• Provision of payphones is a licence obligation (1997)

• Telkom may use third parties to provide the payphone service, but remains fully liable for any failure of such third party to provide the service

• Strict rules on the removal of payphones• Current payphone obligations have been carried over into Telkom’s

ECS/ECNS licences

2

Base & Revenue – History performance

R 649

R 794 R 862 R 949 R 1,070 R 1,010R 928

R 668 R 631R 515 R 518

147,717164,870

176,784 170,187185,271

181,230 175,731 169,310 165,461 157,959

142,882

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

0

200

400

600

800

1,000

1,200

HISTORIC TRENDS

REVENUE BASE

YEAR

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• Declining Revenue• R1.1billion in 2001/2 to R518 million in 2006/7

• Low income phones• 64,443 phones with revenue of R0 – R100 per month

• High cost structure• R879m opex per annum

• Old Technology• Phones exceeded life span of payphones: 5 years

• Unattractive tariff structure• Telkom R2.75 a minute vs. competition 90c a minute

• High Fixed to mobile Interconnect Charge• Blended rate of R1.25 per minute.

Payphone business challenges2

Payphone Operating Rev & Exp (2007/8)

Revenue Total OPEX Interconnect

R518m R548m R272m

• Interconnect is the biggest “cost” line item in our business.

2

Payphones are run at a lost

Currently Telkom pays the full R1.25 to terminate on CST from our network, whereas the mobile pay each other 6c to terminate from a CST on their networks

Payphone & CST Interconnect Regime

Telkom MobileTelkom Payphones 235 125

Mobile MobileCST’s 90 6

Telkom MobileTelkom Payphones 116 6

2

Cu

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t R

egim

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Reg

ime

Telkom’s request on termination rates

• Telkom should be entitled to the CST termination rate of 6c when terminating calls from payphones on mobile networks.

• It is particularly important that the 6c also apply to ordinary mobile phones as firstly the majority of calls terminate on mobile phones, and secondly CST’s may currently terminate on mobile phones at this 6c termination rate.

• In addition Telkom should also be entitled to terminate ordinary landline calls to CST’s at 6c, since mobile customers currently enjoy this privilege.

• At some later stage Telkom would be amenable to the idea that all CST/payphone operators terminate at a technology averaged cost based rate per operator; as determined by ICASA.

2

Giving effect to Telkom’s request on termination

• The CST rate is not regulated by the EC Act nor regulation. The matter is part a common licence obligation on mobile operators carried forward from their previous mobile licences, and part a mutual agreement.

• The Minister could as a first step issue a ministerial policy directive instructing ICASA to see to it the mobile operators terminate Telkom’s customers on CST’s at 6c, and Telkom’s payphones terminate on all mobile networks (CST and ordinary) at 6c.

• To the extent that ICASA may not have a tool at hand to implement this quickly by law (the only legal process is a market review, which may take time)

2

• If Telkom were to obtain from the mobile operators the same termination rate of R0.06 per minute for calls from its public payphones to mobile numbers.

• Telkom commits to pass the reduction totally to users of its public payphones.

• This would result in an immediate savings of R1.19 per minute on all such calls.

2

Giving effect to Telkom’s request on termination

Key messages



13



General comments

• Generally, the regulation of termination rates has received inadequate attention in order for consumers to derive the benefits of more affordable retail rates

• Telkom views effective regulation as being both necessary and critical for the long-term vitality of the broader communications market and for consumers to benefit from lower prices

• Due to the importance of termination rates and its impact on the provision of other services, its regulation must be undertaken in a balanced, proportionate manner, reasonable and forward-looking manner

3

The importance of Chapter 9 institutions

• Telkom has considered the applicable legislation regarding, in general, Parliament’s powers, and in particular, powers conferred to Portfolio Committees

• While Telkom appreciates the opportunity to share its views with the Committee on termination rates, this is done within the context of the generality of section 56 of the Constitution and Rules 138, 201 and 202 of the National Assembly

• Telkom views Parliament as having been entrusted with securing the independence, impartiality, dignity and effectiveness of Chapter 9 institutions

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The importance of Chapter 10 of the ECA

• Telkom has construed section 41 of the ECA to be concerned with empowering the Authority to intervene in the determination of a framework for wholesale interconnection rates “…taking into account the provisions of Chapter 10.”

• Telkom is of the considered view that, consistent with Parliament’s intention, undertaking a Chapter 10 process in the determination of the framework of rates under section 41 is both indispensable and desirous

• Telkom considers that reference to Chapter 10 in section 41 by Parliament is not coincidental but based on an appreciation of the complexities surrounding the regulation of prices

13

Key messages




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Concluding comments (1 of 2)

• Termination rates is but one factor impacting the costs to communicate. Other regulatory areas includes the ex-ante competition framework, etc.

• Overall impact of a reduction in termination rate presumed to be positive on Telkom – yet not clear what the full implications will be.

• Telkom will provide concrete proposal for addressing the unfavourable termination rates between public payphones and the Community Service Telephones (CST’s) provided by the MCO’s.

• If Telkom were to obtain from the mobile operators the same termination rate of R0.06 per minute for calls from its public payphones to mobile numbers

• Telkom commits to pass the reduction totally to users of its public payphones. This would result in an immediate savings of R1.19 per minute on all such calls.

4

Concluding comments (2 of 2)

• Telkom believes that the regulation of termination rates is exclusively within the regulatory competence of the Authority

• Parliament ought to be mindful of the provisions of the Constitution when purporting to exercise its powers in relation to matters that fall to be regulated by the Authority

• Telkom reaffirms its commitment to participate in any endeavours aimed at reducing communications costs provided that the integrity of the process of lawfully permissible

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Thank you

Documents

Ms Pinky Moholi: Managing Director, Telkom South Africa