Cablegate: South Africa: High Telecom Prices, Little Relief

Published: Thu 28 Jul 2005 02:47 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
C. 04 PRETORIA 5556
D. 04 PRETORIA 4028
(U) This cable is Sensitive But Unclassified. Not for
Internet distribution.
1. (U) Summary. President Mbeki condemned South Africa's
high fixed telephone line prices in his February 2005 State
of the Nation address by stating that they cost ten times
more than in developed countries. Mbeki's assertion was
mainly directed at Telkom, the de facto monopoly for fixed
line telecom and broadband services. The mobile phone market
also shares in the blame for high telecom prices despite the
fact that three mobile phone operators compete for business.
In April 2005, Genesis Analytics completed the latest in a
series of studies on high telecom prices in South Africa.
Out of the 15 developed and developing comparison countries
selected, telecom charges in South Africa were 37% to 399%
percent higher than the average costs in 9 out of 10
categories. The South African Government's Department of
Communications (DOC) responded by quickly organizing a
two-day colloquium on the pricing of telecom services in
July. The colloquium concluded that slow steps are being
taken in the right direction to reduce high telecom prices,
such as the imminent introduction of a Second National
Operator (SNO), changing Value-Added Network Service (VANS)
provider regulations, the Convergence Bill, and the recent
cap of Telkom prices at 3.5 percentage points under
inflation. Unfortunately for the consumer, the DOC plans to
hold another colloquium in October, which means that little
will be done in the immediate future to speed up telecom
reforms and introduce effective competition to jump start the
industry. End Summary.
Wrong Numbers
2. (U) In his February 2005 State of the Nation address,
President Mbeki condemned South Africa's high fixed telephone
line prices, stating that they cost ten times more than in
developed countries. Mbeki's goal was to pressure Telkom,
the 38% government-owned de facto monopoly for fixed line
telecom services, to lower prices. Since the late 1990s,
Telkom has cut costs by slashing jobs and taking on new
technology, but has passed on only a fraction of these
savings on to the consumer. Consumers have grown
increasingly frustrated watching Telkom generate R40.8
billion ($6.5 billion) in revenue and take home R6.3 billion
($1.0 billion) in pre-tax profits in 2004. One of the
starkest examples of Telkom's damage is that of the 2.8
million fixed telephone lines rolled out since the late 1990s
to serve primarily previously disadvantaged (black) areas,
70% of them have been disconnected for non-payment. Many
South Africans simply could not afford the over 300% price
increase in peak-rate local calls from 1997 to 2003, and as a
result, the number of residential lines per 100 people fell
from 6.5 in 1997 to 5.3 in 2003.
3. (U) Even though three mobile phone operators compete for
business, the mobile market has not fared much better than
the fixed line market. The Communications Users Association
of South Africa (CUASA) has termed mobile phone charges as
"obscene." The telecom regulator, Independent Communications
Authority of South Africa (ICASA), noted that Cell C's
introduction to the market to compete with Vodacom and MTN
did not result in a fall in real prices. (Note: Telkom owns
50% of Vodacom and Vodacom has over a 50% mobile phone market
share. All mobile phone operators must make use of Telkom
leased lines for calls to landlines, international
destinations, and certain national locations. End Note.) On
July 18, ICASA released a discussion document on this topic
stating its determination to establish whether high mobile
charges are justifiable and if regulatory intervention is
Dialing for Dollars
4. (U) A number of studies have highlighted the high telecom
prices faced in South Africa when compared to other
countries. Genesis Analytics completed the latest assessment
of the industry in April 2005. To fend off some of the
criticisms of past reports, Genesis compared South Africa to
both developed and peer group countries that adhered to "best
practices." Developed countries included Canada, Hong Kong,
Israel, Norway, Singapore, Sweden, South Korea, and the
United States. Peer group countries included Brazil, India,
Malaysia, Morocco, Philippines, and Thailand. Below is a
summary of how South Africa compared:
Telecom Comparison to Times Greater
Service Average Cost Than Low Cost
--------------------- ------------- -------------
Int'l Leased Lines 399% Higher 31
Business - Local Calls 199% Higher 11
Business - ADSL 148% Higher 9
Retail - ADSL 139% Higher 8
Business - Mobile 107% Higher 23
Domestic Leased Lines 102% Higher 15
Retail - Local Calls 79% Higher 8
ISP Fees 45% Higher 5
Retail - Mobile Calls 37% Higher 11
Business - Int'l Calls 14% Cheaper 3
(Note: ADSL = Asymmetric Digital Subscriber Line allows
broadband Internet access over existing copper telephone
lines. ISP = Internet Service Provider. Most service
comparisons include all 15 countries; however, some
comparisons include as few as 11 countries. End Note.)
5. (U) The Genesis study painted a grim picture of high
telecom prices in the South African market. Charges in South
Africa ranked the highest in five of the ten categories. The
five categories included Int'l Leased Lines, Business - Local
Calls, Business - ADSL, Retail - ADSL, and Domestic Leased
Lines. Charges in South Africa were the second highest in
Business - Mobile Calls and ranked fourth or fifth highest in
the remaining categories. Costs of international calls from
South Africa fared the best due to the competition from Voice
Over Internet Protocol (VOIP) and call-back options in the
6. (U) The Genesis study concluded that, while regulatory
changes in process are a step in the right direction (Refs A
through D), more needs to be done to bring down prices. The
study pointed out that no one had yet addressed Telkom's
ongoing monopoly of international bandwidth and the non-VOIP
voice market. Value-Added Network Service (VANS) providers
had gained some regulatory ground, but they had not yet
attained a level playing field with Telkom. For example,
while VANS could offer VOIP, Telkom still controlled the
bandwidth necessary for this service. In addition, Telkom's
ISP did not pay the same price as independent ISPs for
bandwidth. Overall, Genesis warned of the draining effect
high telecom prices would have on the economy and advocated
for increased competition in the telecom market and increased
ICASA intervention where competition is not feasible.
Can We Talk?
7. (U) The South African Government's (SAG) Department of
Communications (DOC) responded to public outcry by quickly
organizing a two-day colloquium on the pricing of telecom
services. On July 14 and 15, the DOC directed a program of
speakers and breakout sessions to about 250 participants from
the public and private sectors. The speakers included
representatives from the DOC, ICASA, and CUASA.
8. (U) DOC Deputy Minister Radhakrishna "Roy" Padayachie
opened the colloquium calling on everyone to "open (their)
minds" in regard to pricing issues in the telecom sector. He
emphasized the need to lower the costs for the average
citizen and advocated state intervention to merge the first
and second economies. Padayachie also stressed the
importance of lowering the cost of doing business in order to
increase growth and foreign direct investment (FDI) in South
Africa. He singled out the call center and outsourcing
industries as means to create jobs and curb unemployment.
(Note: Industry analysts project that the call center
industry could create between 65,000 to 100,000 jobs by 2009.
End Note.)
9. (U) Padayachie wavered back and forth on whether he
thought previous studies had provided appropriate country
comparisons for South Africa. The strongest statements he
made were that South Africa's prices "could in fact be stated
as high" in comparison to other countries and that South
Africa compared "very poorly" to Brazil and India. He did
state, however, that Telkom's charges, which "could be
described as unaffordable," have driven consumers to the
mobile market (even though mobile charges are high as well)
and are hampering the roll out of the Internet. In
conclusion, Padayachie made his pitch for "collaborative
solutions" between the DOC, ICASA, and operators. The DOC's
focus in this collaboration will be on policy development and
ensuring that an adequate regulatory framework and
infrastructure are in place. Padayachie urged ICASA to take
a more active role and focus on the Convergence Bill (Ref A)
and imminent Second National Operator (SNO) licensing
agreement (Ref B). (Note: Padayachie said the SNO licensing
agreement would be finalized in a "matter of weeks." End
10. (U) Dr. Tracy Cohen, an ICASA Councilor, took the stage
to make a hurried presentation from the regulator's point of
view. Cohen began her talk stating that a "much needed
dialogue" was needed on telecom pricing. She echoed
Padayachie's calls for attracting FDI and improving consumer
welfare. She noted ICASA's recent achievements of capping
Telkom's prices to 3.5 percentage points less than inflation,
upcoming SNO introduction, and VANS regulations. At the same
time, Cohen warned that costs will take time to decrease and
wondered if more could be done to overcome the regulatory
challenges. Cohen announced the July 18 release of a public
discussion document on mobile pricing and an upcoming
discussion document on ADSL findings. In summary, Cohen
expressed ICASA's mutual concern on telecom pricing issues
and willingness to play its part in attaining lower, but
sustainable prices in the future.
11. (U) After government stated its opinions, consumer
advocates and operators offered their take on the situation.
CUASA representative Ray Webber detailed CUASA's gripes,
including the long, unknown wait for the SNO to enter the
market, Telkom's lack of per second billing, high mobile
phone charges, and the fact that ADSL is out of reach for
most users. The five main telecom operators, Telkom, Sentech
(wireless Internet provider), Vodacom, MTN, and Cell C,
participated in a panel discussion. The operators had little
to offer in terms of substance or alleviation from its high
prices. Telkom came out on the offensive, highlighting the
fact that telecom prices are a small part of inflation, some
tariffs are way below international standards, and that it is
not making "super economic profits." Telkom also noted that,
as of August, its retail ADSL prices will decrease by 30%,
its overall prices will be reduced as a result of ICASA's new
price cap, and that telecom costs of compliance are high.
(Note: In accordance with ICASA's new price cap, Telkom
recently presented its revised pricing structure for
approval. Telkom plans to reduce overall prices by 3%,
however, certain service charges will increase while others
decrease. End Note.) Vodacom welcomed public debate on
pricing issues; Cell C regurgitated the regulations mobile
operators had to comply with, while MTN assured us that its
executives were "spending hours on pricing" issues in the
Can We Talk Some More?
12. (U) At the end of the colloquium's first day, three
breakout sessions were held to seek resolution on the issues
of policy and regulatory framework, affordable broadband, and
affordable universal access. The breakout groups reported
their findings back to the group on the second day. The
groups commonly expressed the need to for more information
sharing with the public, annual benchmarking studies with an
agreed comparison group, and making competition effective.
Under competition, the groups emphasized the need for
unbundled access to local loop telecom lines and facilities
and consumer options to readily switch operators.
13. (U) The common theme surrounding the colloquium was that
steps are being taken in the right direction to reduce high
telecom prices, such as the introduction of the SNO, changing
VANS regulations, the Convergence Bill, and the recent cap of
Telkom prices at 3.5 percentage points under inflation. The
pace of the steps, however, needs to be quickened and more
can be done. When DOC Deputy Minister Padayachie closed the
colloquium, he crushed this promising theme in describing the
way forward. He announced that there would be another
colloquium on this issue held on October 14 - 16. The
October meeting would be held to discuss the paper from the
first colloquium, prioritize issues from this paper, and
gather further input from peer countries. Padayachie went on
to take nominations for a telecom pricing working group to
address these issues and mentioned plans of completing more
benchmark studies by the end of the year. Essentially, the
DOC plans to hold another meeting to discuss the first
meeting and do additional analysis on this topic. This plan
fulfills the breakout groups' desire to increase information
sharing and conduct additional studies. This plan, however,
does nothing to expedite current reforms in place or provide
a roadmap to effective telecom competition in South Africa.
14. (SBU) This colloquium had great promise, but failed to
bring about potential long-term resolutions to high telecom
prices. The DOC seems intent on continuing to identify and
study the problem ad nauseam instead of implementing
efficient and effective solutions. Conducting another study
is going to result in telling the DOC, ICASA, and the
operators what they already know -- effective competition
needs to be introduced so that telecom prices can be reduced.
Without these measures, universal affordable access will
never be attained and foreign business will continue to
invest elsewhere. The real work lies in identifying the best
way to implement effective competition and let private sector
led growth lead the charge.
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