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Tuesday 13 October 2009

Comments on Proposed Measures to Reduce the Interconnection Rates and High Costs of Telecommunications in South Africa. Tuesday 13 October 2009. 1 1. Table of Contents. Introduction Smile Team Smile Business Vision Interconnection, Universal Service and Competition Determining “Cost”

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Tuesday 13 October 2009

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  1. Comments on Proposed Measures to Reduce the Interconnection Rates and High Costs of Telecommunications in South Africa Tuesday 13 October 2009 11

  2. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 22

  3. Smile Team • Irene Charnley : Chief Executive Officer • Neo Lesela : GM: Programme Management Office • Didier Mbayo : Manager: Regulatory Affairs 33

  4. IntroductionSmile Business Vision A low cost telecommunications operator providing affordable communications using new technologies and innovative business models 44

  5. IntroductionInterconnection, Universal Service and Competition • Smile is a new entrant who intends to provide affordable communication services to the lower end of the market in SA (people who cannot afford essential communication services and earn R15 or less per day) by: • Making use of innovative technologies; and • Developing new business models • Affordability in SA remains a challenge - whilst penetration levels of mobile communications may seem high, a vast majority of the population cannot make calls • Interconnection rates are a key component in the attainment of our vision • High mobile termination rates in SA: • Constitute a bottleneck for new entrants to compete on the same level with incumbent telecom operators • Make it difficult for new entrants to ensure the provision of a variety of communication services at affordable prices to consumers 55

  6. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 66

  7. Determining “Cost”: Using Available Information • One of the key stumbling blocks appears to be the determination of ‘cost’ in South Africa • Information asymmetry cannot be an excuse for maintaining high interconnection rates • Findings of ICASA’s previous COA/CAM studies should be made public and inform the present debate • If the information is not available, the PCC should benchmark to support its 60 cent proposal. An approximate rate can be derived using: • an estimate of the network costs of the mobile operators through benchmarking against similar operators (i.e. with similar traffic flows, Capex and Opex, network size, developing country context) coupled with; • publically available financial information 77

  8. OVERVIEW In many countries rates are in the ballpark of the PCC’s initial 60 cent proposal Rates in regulated countries range from R0.35 to R0.55 using today’s exchange rates; Rates in commercially negotiated countries are generally US$0.15 or below (SA is $0.16). Despite initial protestations and threats to reduce or remove investment, operators, including South African operators, have complied with Government-lead efforts to reduce termination rates European Commission recently suggested using benchmarking for NRAs with limited resources and time where it is able to be demonstrated that outcomes consistent with those in a competitive market can be generated Determining “Cost”:Lower Interconnection Rates in Africa *2 rate decreases in 2010, Y# represents second decrease 88

  9. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 99

  10. Proposal 1: Drop Rates from 1 Nov Reduced rate of 60 cents during peak times Rates must be reduced urgently to at least 60 cents per minute. This will: enable new entrants to compete on the same level with incumbent operators; lead to an increase of universal service and access in SA by providing affordable communications services to the lower end of the market - high network coverage is not accompanied by high penetration or usage. However, the proposal might remove the asymmetry between fixed and mobile rates as it does not explicitly state that it only applies to mobile operators but refers to “telecom operators”: “telecom operators” may include fixed line operators and enable them to effectively increase their interconnection rates; Telkom presently R0.29 Peak and R0.16 Off-Peak and Neotel R0.20 Peak and Off-Peak; a proportionate reduction in fixed termination rates should be considered. 1010

  11. Proposal 1: Drop Rates from 1 Nov Reduced rate of 60 cents during peak times (2) No mention is made of the off-peak reduction Smile is of the view that it is critical that the proposed reduction is made at Peak and Off-Peak times In many jurisdictions a single rate is imposed (e.g. Tanzania, Uganda) Smile believes that if a single blended rate is agreed in SA it should be supported by: traffic information; and a demonstration of the real impact that such rate reduction will have on retail rates, particularly for an “average subscriber” or Bottom of the Pyramid subscriber 1111

  12. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 1212

  13. Proposal 2: Glide PathRates reduced by 15 cents annually until 2012 This approach, i.e. glide path, will bring termination rate down to the cost of an efficient operator Such progressive reduction is consistent with international good practice and the trends followed by African, South American and European countries In Africa; Uganda, Kenya, Tanzania and Namibia have established a glide path of 4 or more years to drop the interconnection rates 1313

  14. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 1414

  15. Proposal 3: Retail Rate ImpactReductions should yield corresponding retail price reductions Smile wholly agrees that reductions in interconnection rates between 2009 and 2012 should yield parallel reductions in the actual consumer (retail) prices for end-users The absence of a parallel reduction will simply point to the inefficiencies of South African operators - South African consumers should not be paying for the inefficiencies of the operators COA/CAM studies should shed light on operator efficiency Outcomes of such studies by ICASA should be made available to inform the debate In the absence of such information, benchmarking should be relied on “Waterbed effect” argument should be discredited, i.e. reductions in one area (interconnection rates) will lead to increases in other areas The argument then goes to state further that this could result in a negative impact on retail rates, consumer uptake and ultimately, universal service and access 1515

  16. Proposal 3: Retail Rate ImpactReductions should yield corresponding retail price reductions (2) As a low cost operator, Smile is highly cognisant of methods that operators can use to reduce their costs and operate more efficiently. This will allow operators to pass on savings to end users. Example of SA Operator inefficiency: Operators’ cost of sales is affected by the fact that they currently make a higher commission payment to service providers in SA compared to other parts of Africa; High commissions in SA, and other inefficient practices that operators engage in, result in the higher costs of communication to the detriment of South African consumers; A corresponding reduction of commissions to between 10% - 15% would reduce the loss on potential revenue that will be argued by the operators, improve efficiency and reduce costs. 1616

  17. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 1717

  18. Implementation of ProposalsSpeedy and effective implementation is key • Implementation of any outcomes of the PCC’s process is key • ICASA and the operators’ process initiated on 08 September 2009 “to discuss ways of reducing the cost of call termination in SA” should not be negated to the extent that it will take today’s proposals forward • We suggest co-ordinated action between the PCC and ICASA in order to ensure immediate implementation • ICASA as the implementation arm, must be held accountable and it or any relevant implementation or policy body, must act swiftly to implement the outcomes of this process • Parliament has an important monitoring and oversight role to play to ensure that the agreed outcomes and actions arising from this process and the public hearings are implemented as soon as possible by the relevant bodies, i.e. ICASA, and the affected operators 1818

  19. Table of Contents • Introduction • Smile Team • Smile Business Vision • Interconnection, Universal Service and Competition • Determining “Cost” • Benchmarking: Regulated Interconnection Rates in Africa • Proposal 1: • Drop rates from 1 Nov to 60 cents during peak times • Proposal 2: • Interconnection rates be reduced by 15 cents annually until 2012 • Proposal 3: • Reductions in interconnection rates should yield corresponding reductions in retail prices • Implementation of Proposals • Summary and Conclusion 1919

  20. Summary and Conclusion • In summary: • Smile fully supports the PCC’s proposal to reduce the interconnection rates urgently and by no later than January 2010; • Interconnection rates should be reduced gradually each year using a glide path, as this is in line with good practice; • A reduction in interconnection rates between 2009 – 2012 should result in corresponding reductions in the actual consumer (retail) prices; • Information asymmetry cannot be an excuse for maintaining high interconnection rates to the detriment of consumers and competition; • Where cost information exists it should be made available; or • If this is not possible, benchmark SA consumers and competitors cannot afford to wait any longer Implementation and enforcement is key – ICASA should be responsible and held accountable for implementing any outcomes of this process in a speedy and effective manner 2020

  21. Annexure – Country Data 2121

  22. Determining “Cost”:Regulated Interconnection Rates in Africa (2) Country Mobile Termination Rate (MTR) Fixed Termination Rate (FTR) Kenya Effective from 1 March 2007 KSH 6.28 equivalent of R 0.66901cents Effective from 1 March 2007 KSH 1.74 equivalent of R 0.18536 cents Effective from 1 January 2008 KSH 5.27 equivalent of R 0.56141 cents Effective from 1 January 2008 KSH 1.65 equivalent of R 0.17577 cents Effective from 1 January 2009 KSH 4.42 equivalent of R 0.48 cents Effective from 1 January 2009 KSH 1.61 equivalent of R 0.16 cents Tanzania Effective from 1 January 2008 USD 0.0783 equivalent of R 0.587 cents Effective from 1 January 2008 USD 0.0783 equivalent of R 0.587 cents Effective from 1 January 2009 USD 0.0765 equivalent of R 0.562 cents Effective from 1 January 2009 TSH USD 0.0765 equivalent of R 0.562 cents Effective from 1 January 2010 USD 0.0749 equivalent of R 0.562 cents Effective from 1 January 2010 USD 0.0749 equivalent of R 0.562 cents Effective from 1 January 2011 USD 0.0732 equivalent of R 00.54 Effective from 1 January 2011 USD 0.0732 equivalent of R 00.54 Effective from 1 January 2012 USD 0.0716 equivalent of R 0.537 Effective from 1 January 2012 USD 0.0716 equivalent of R 0.537 2222

  23. Determining “Cost”:Regulated Interconnection Rates in Africa (3) Country Mobile Termination Rate (MTR) Fixed Termination Rate (FTR) Uganda Effective from 1 September 2009 USH 91 equivalent of R 0.35417 cents Effective from 1 September 2009 Fixed Termination Near End USH 95 equivalent of R 0.36974 cents Fixed Termination Far End USH 88 equivalent of R 0.34250 cents Effective from 1 September 2010 USH 91 equivalent of R 0.35417 cents Effective from 1 September 2010 Fixed Termination Near End USH 95 equivalent of R 0.36974 cents Fixed Termination Far End USH 88 equivalent of R 0.34250 cents Effective from 1 September 2011 USH 89 equivalent of R 0.34639 cents Effective from 1 September 2011 Fixed Termination Far End USH 87 equivalent of R 0.33861 cents Namibia Effective from 1 July 2009 N$ 0.60 Cents equivalent of R 0.63305 cents Effective from 1 July 2009 N$ 0.60 Cents equivalent of R 0.63305 cents Effective from 1 January 2010 N$ 0.50 Cents equivalent of R 0.52755 cents Effective from 1 January 2010 N$ 0.50 Cents equivalent of R 0.52755 cents 2323

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