COSATU Submission on the Consultation Document: Review of Rate Regime for Public Switched Telecommunication Services Submitted to ICASA, 31 January 2001

Introduction

COSATU welcomes the inclusive consultation process being followed in relation to the rate regime for Public Switched Telecommunication Services (PSTS), as set out in the Telecommunications Act of 1996. This constitutes our submission on the Review of Rate Regime for Public Switched Telecommunication Services: Consultation Document ["the Review"], as published in Government Gazette No. 21925. We look forward to further engagement with ICASA in future stages of the process.

Telkom has just released its fee increases for this year, which appear to continue the trend of increasing local call charges and line rentals, with a 16% higher minimum charge reported. These increases have been greeted with dismay by consumers, the poorest of whom are likely to be worst hit. The recent increases demonstrate the need for a new regime which is aimed at affordable universal service, and we hope that this timely Review will ensure progress towards this.

COSATU’s approach to telecommunications tariffs rests on several pillars:

1. the direct interests of our members employed in the telecommunications sector;

2. accessibility and affordability of telecommunications services to working people and the poor;

3. the importance of this sector for South Africa’s economic growth and development.

Moving from these premises, this submission sets out our overall approach to telecommunications and subsequently responds to the specific issues on which ICASA requests public comment.

COSATU’s Vision for Telecommunications

We understand that the Department of Posts Broadcasting and Telecommunications is currently embarking on a consultative process towards a new telecommunications policy for South Africa. COSATU intends participating in this process and making a more substantive submission as to our overall perspective on this crucial sector. In this submission we will thus outline the key pillars of our approach in order to contextualise our comments on the specific issues raised in the Review.

Universal service

Access to telecommunications is a basic need and right. This is necessary for people’s full participation in society and the economy. Lack of access wastes time and money and limits people’s opportunities. Universal access to telecommunications is also crucial to building an inclusive and cohesive society and for the strengthening of democracy.

At present, telecommunications services remain severely racially and spatially skewed.

The 1999 October Household Survey data indicate that just 7.3% of African Households in non-urban areas have a phone (including cell phones) compared with 85.6% of white households, while in urban areas 31.8% of African households have a phone compared with 87.6% of white households. This is in fact a lower proportion of urban African households than in the 1998 October Household Survey, which found that 32.4% of African households had a phone. While Telkom’s roll-out programme has increased the number of phones in ‘under-serviced’ areas, the extension levels are still low, and are linked with the prices being charged for the services. This leads to ‘churn’, that is, lines falling into disuse because people cannot afford to pay the monthly rentals and call charges. According to Telkom’s own report on its licence obligations in the year to 31 March 2000, it achieved a roll-out of 621 219 new lines compared with the target of 575 000. But, 223 386 lines were disconnected over the same period. The impact of much higher prices for local calls and rentals (discussed below) clearly affects low-income, predominantly black, households to a greater extent.

The extension of telecommunications has been very poor, and several countries which had lower levels of provision of telephone services in 1989 have overtaken South Africa in the past ten years. Changes in service provision are especially poor in terms of residential lines. The number of telephone lines in South Africa rose from 8.31 per 100 inhabitants in 1989 to 12.47 in 1998 (1). In Malaysia, over the same period, lines rose from 8.00 per 100 inhabitants to 20.16. In Chile, from 4.98 to 18.57. Residential main lines have almost remained static in South Africa. Lines per 100 households in South Africa have only risen from 27.2 in 1989 to 29.1 (in 1996). In Malaysia, they rose almost threefold, from 28.5 to 73.3 in 1998. In Chile they increased four times, from 16.4 to 66.2.

This compounds the observation from the Household Survey data that the net increase in lines is not nearly as large as suggested by the roll-out figures, and that it needs to increase at a much greater rate if telecommunications are going to play their potential role as a driver of economic growth.

Affordability

Affordability is the flip side of universal service: rolling out and maintaining telephones is not sustainable unless these services are universally affordable. "Churning" is a direct outcome of high rental and call costs. Given the high levels of poverty and unemployment in South Africa, affordability means substantive and ongoing state funding as well as cross-subsidisation. These issues are discussed further in the next section of this submission.

State ownership

COSATU strongly believes that the state is best placed to provide basic services such as telecommunications. Telecommunications infrastructure is part of the environment which makes economic activity possible - it is an important determinant of the cost structures of firms and of their spatial location. The benefits from infrastructure for the economy as a whole are therefore much greater than what can be earned by charging for services. These benefits arise because there are economic effects from telecommunications services which have effects beyond the two groups involved in the sale of the services themselves (i.e. Telkom as the seller and the customer as the purchaser of the services). It is well recognised in mainstream economic theory that when such effects exist (termed ‘externalities’, as they are external to the transaction in question) free-market transactions will not be economically efficient. Efficient outcomes in these situations require government intervention.

Private owners will only take into account the narrow financial gains to themselves in deciding how much to invest. The private sector will always under-invest in infrastructure such as telecommunications as investors do not take account of the wider economic effects. They are also risk averse meaning that they base their decisions on existing demand, rather than the potential demand which may arise from the economic growth which is made possible by the infrastructure provision itself. This means less infrastructure and less jobs in operating that infrastructure. The location of infrastructure is also very important for addressing the effects of apartheid. Black economic empowerment means providing infrastructure in historically disadvantaged areas. Private owners have limited interest in doing this.

Telecommunications also improve the provision of other essential services such as education and health. The private sector will not take into account the benefits in terms of wider and better provision of health and education that come from extending telecommunications. In addition, there are impacts from telecommunications services which affect development more broadly but which may be difficult to quantify. These include the importance of telecommunications for being able to participate in the political, economic and social activity in a country. It is impossible to work out the value of information and communication purely in Rand terms, yet it is clearly important.

More especially in a country such as South Africa with massive infrastructural and service backlogs and extreme inequalities, "pure" competition in a basic needs sector such as telecommunications is particularly inappropriate. This would be likely to result in "cherry-picking" of profitable market segments and neglect of the majority. It is relevant to note that even in developed countries which now have a competitive regime, it was through a state driven approach that telecommunications were rolled out in the first place. We return to these issues in the course of this submission.

The argument that globalisation requires a reduced role for government, with policies such as privatisation, is based on a false analysis. A country’s ability to participate in the international economy depends on its infrastructure, and particularly telecommunications. This requires government support and a longer-term development approach if South Africa is to take advantage of the opportunities available from globalisation. Industrial economies already have a mature infrastructure which provides the basis for global economic links.

In the context of a mixed economy continued government ownership provides a range of benefits:

1. Government ownership is an important way of setting non-profit objectives. These may conflict with the objectives of the private shareholders, meaning the government, as shareholder, must enforce its conditions.

2. Ownership combined with regulation of the existing private sector is almost certainly better than relying solely on regulation. As an owner the government has access to much more information on the performance and decision-making of the firm than the regulator. The conflict between SATRA and Telkom illustrates this.

3. Government can ensure that a longer-term perspective is adopted to grow the market rather than short-term, shareholder driven profit.

4. Ownership ensures a stream of returns from the business go the state.

Ownership alone, however, is clearly not a guarantee of service orientation. Where there are private shareholders who prioritise profit maximisation, this will inevitably put pressure to scale down the meeting of universal service obligations, increase prices and so on. This underlines the need for tight ongoing regulation.

Economic development

Telecommunications have been identified as particularly important for economic development because they directly impact on the nature and level of economic activity. They also increase the efficiency of institutions and make service delivery more effective and potentially cheaper. It has long been recognised that government has a primary role to play in facilitating the development and adoption of new technologies. This is the case with the recent developments in information and communication technology including the internet. Many of the gains from these technologies extend beyond the institutions using them and rely on their widespread adoption. Government action is necessary to ensure linkages are achieved between enterprises, public institutions (in education, health, research etc.) and financial incentives for investment and innovation.

It is widely recognised that infrastructure investment is closely associated with economic growth and development (2). A recent study of employment and unemployment in South Africa found strong and significant correlations between provision of telecommunications services and the ability to find employment (3). There are important backwards and forwards linkages of telecommunications infrastructure with other sectors. For example, it is linked closely to manufacturing of the electronic equipment used in setting-up and running the infrastructure. Increased service provision will have positive knock-on effects on production and employment in other industries and sectors. Private firms also view employment as a cost to be minimised but, in a situation of high unemployment the ‘savings’ achieved by private firms in reducing employment are not savings from the point of view of the economy as a whole. Increased investment in telecommunications infrastructure also has a range of multiplier effects through the increased demand for equipment and materials which stimulates growth in upstream sectors. The cost of direct government support for investment in infrastructure will therefore be partly recouped through the effects of this spending on growth and employment (and thereby on tax revenues).

Job retention and creation

It is generally accepted that South Africa is currently facing an unemployment crisis, and that addressing this crisis is arguably the central policy challenge facing us. Any policy initiative needs to be guided by the imperative of protecting current jobs and creating new ones.

Telkom has shed a fifth of its workforce over the past year, with the number of employees falling from 61 237 staff members in 1999 to 49 128 in 2000. The planned retrenchments which are currently under dispute between Telkom management and workers would worsen the unemployment situation.

Job retention and creation in the telecommunications sector is not only compatible with universal service provision: the massive rollout of infrastructure and services required is actually dependent on a sufficient number of employees who are adequately trained and motivated. Productivity is not a function of employment levels: it may be increased by raising output rather than reducing employment. Telkom should be investing in training staff, rather than retrenchment. In this way it internalizes costs associated with human resource development, particularly where there are skill shortages

Responses on Specific Issues

Introductory section: Competition and Privatisation

The Review accepts as a starting point the introduction of competition and the phasing out of cross-subsidisation in preparation for this. As discussed above, COSATU regards state ownership as most appropriate for the telecommunications sector. Furthermore, we believe that cross-subsidisation will be necessary on an ongoing basis in order to deliver affordable and sustainable universal service. It should also be noted that competition does not necessarily mean efficiency, because:

• if there are two operators, they may both earn high profits by co-operating/colluding with each other and not compete vigorously;

• they may both operate as monopolies in different areas/in different markets;

• barriers to entry - which can be created by the incumbent and not only as a result of government restrictions - may prevent competitors entering or competing effectively;

• the size and behaviour of the original firm may deter entrants;

• competitors will only try to attract customers in the most profitable areas of the market and may ‘cherry pick’; and

• the competitors will only take into account their own profits, and not the benefits to the economy and country.

There is in general unfounded confidence in the effects of competition, both in the 1996 Act and in expectations of future entry. We reject this premise which leads to problematic recommendations in later sections of the Review.

Mention is made (at 1.3) of the fact that there are now considerably more mobile phone users than those on Telkom’s network (6.9 million as opposed to 5.5 million respectively). This is indicative not only of South Africa’s gross inequality – the majority of cell phone users have a landline as well and the tremendous growth in the cell phone market demonstrates the high personal disposable income of the upper income brackets – but also the slow pace of the rollout of Telkom lines. Many low-income consumers are making use of cell phones, which they cannot afford and which reduce the income available for other expenses, because of the lack of alternatives.

Q1: Overall price regime

ICASA accepts (at 3.7) the need for "rebalancing" of prices in order to remove cross-subsidisation prior to competition becoming "fully effective". This premise leads to problematic policy recommendations and, in practice, will hinder the meeting of the objectives of delivery and accessibility. Cross-subsidisation is an accepted principle of service delivery for governments around the world in the provision of water, electricity, telecommunications etc. It has also been used historically in South Africa, for example to extend services to farmers where the costs of rolling out infrastructure are relatively high. These are basic services and it is regarded as unfair to expect the poor to pay the same amount per unit as the wealthy. More so in a country such as South Africa, with massive inequalities and service backlogs. Moving towards cost-based pricing means that those who do not yet have access to telecommunications – predominantly poor and black – would be paying closer to the full cost, while services have been extended to whites over decades funded through pubic subsidies. Options should be explored for cross-subsidisation, for example the use of staggered tariffs.

Section 3.10 of the Review, which discusses the "rebalancing" of prices to bring them more closely into line with costs, is not only insensitive to the developmental challenges facing South Africa but is also based on flawed economic logic. It argues that "there are strong economic welfare benefits from ensuring that those purchasing goods or services meet the costs of providing them. Failure to do this tends to result in economic distortions and the misallocation of resources. (Resources that are under-priced are over-used and resources that are over-priced are under-used.)" This unabashed "free market" logic is oblivious to the rights of people to affordable telecommunications and the responsibilities of the state in this regard. It also does not take account of the uneven playing field with high backlogs and economic inequalities. There is no reason why the costs of providing a service should automatically translate to price levels which are affordable to consumers or appropriate for South Africa’s economic development.

It is also worth noting that no cost breakdowns are as yet available, so there would be no basis for cost-based pricing. What is happening in practice is that Telkom’s pricing policy is being informed not by costs but by the level of competition in particular market segments. Where there is competition – especially international and long-distance national calls – there have been price reductions while where there is a monopoly – on local calls – there have been major price hikes.

The Review accepts the inevitability of the introduction of competition, an issue to which we will return elsewhere in this submission. It goes further however, appearing to regard competition as an end in itself rather than as a means to other objectives. At section 3.11 it is argued that "pricing significantly below cost by the incumbent monopolist will hinder market entry and the development of competition." In an inverted logic, competition is touted as a mechanism for lowering prices, yet we are warned against prices being too low on the basis that this would hinder competition. The question also needs to be posed: lower prices for whom? While competition may well reduce prices for the upper end of the market, low-income consumers are likely to face either higher prices or no services at all.

Q2: Whether current regime has resulted in meeting of price capping objectives

Price capping is a crucial tool in enterprise regulation. The figures provided in the Review, however, indicate that objectives have not been adequately met. The effective price of exchange line rentals, cumulative over the period 1998-2000 and deflated by CPI, have increased considerably. There have been extremely high price increases for local calls, increasing by 35.6% in standard time and 10.6% in "call more" time respectively (cumulative increase deflated by CPI). The cost of national calls over the 50-100 km range have fallen and those of the >100 km range have fallen even more. The biggest price cuts have been on international calls, of 40%. The costs for the Megaline C Tariff have risen by 74.2%. The ratio of long distance call charges to local calls declined from 21:1 in 1994 to 6.9:1 in 2000.

It is not clear what inflation figures have been used in Table 1 but it is recommended these be checked for accuracy: for example, a figure of 2.6% is used for 2000.

Examining the above figures in distributional terms, it is low-income consumers – predominantly reliant on local calls – who have borne the brunt of price increases, while it is wealthy consumers and businesses who make more long-distance and international calls who have seen their costs slashed. This is the opposite of the desirable situation, and demonstrates the inappropriateness of basing prices either on costs or on the degree of competitiveness in different market segments. The fact that Telkom is a multi-product/multi-service firm also gives it leverage to use its dominant position to ensure control in areas which are not controlled, such as the example cited in 5.5 of digital 2 MBit/s Megaline – Main links (Permanent service) in the 0-50 km distance.

COSATU believes that local telecommunications prices should be falling much faster than they are, and that much stronger, more targeted price capping is required to ensure that services which are disproportionately consumed by low-income consumers fall the fastest.

Q3: Cost allocation and competitive pricing of services

The Review notes that "Unfortunately, Telkom’s internal management accounting has not yet developed to the point where it is able to provide a breakdown of the costs of each individual service, in addition to the revenue received from each service. It is therefore not yet possible to establish Telkom’s financial results by service." The Review goes on to note the limitations brought about by this failure; and the lack of adequate data is referred to as a constraint throughout the Review.

Proper regulation relies heavily on timely, detailed and accurate information, attribution of costs, assessment of externality and growth effects of services, and so on. A firm which is the subject of regulation often has no interest in providing such information. While it is not clear what the reasons are behind Telkom’s lack of capacity to provide the relevant information, we hope that ICASA will play a role in ensuring that Telkom is in a position to provide such information in future.

We refer to the comments in above sections of this submission on the cost-price relationship and relative price changes of different services.

Q4: Price ratios and international price comparisons

The Review compares (at Table 3) various residential prices for South Africa and the United Kingdom, while Annex 3 compares telecommunications prices in a range of African countries. The Review also notes a number of caveats which make international price comparisons (especially with other African countries) difficult and of limited use.

The comparisons made with West European countries are not particularly relevant to South Africa, given that they have mature telecommunications infrastructure, much higher levels of urbanisation, much lower levels of inequality, and much higher wage rates. Although section 7.2.6 notes the importance of basing the monetary comparisons on purchasing power parity calculations, this is unfortunately not reflected in the comparisons provided thus limiting the usefulness of these, particularly the South Africa-UK comparisons which are heavily relied on.

To be useful and policy-relevant, international price comparisons should be made with countries at a similar level of development and should take into account the purchasing power of income as well as distributional patterns. Comparing costs in South Africa and Malaysia for example, residential monthly rentals in South Africa cost twice as much as in Malaysia in 1998, whereas business rentals in South Africa cost only 30% more. A three-minute peak rate local call in South Africa cost more than three times that in Malaysia. Connections charges in South Africa are also very high, at over two-and-a-half times the level in Malaysia.

This section also outlines, with reference to the Swedish and U.S. experiences, what can potentially be a virtuous circle of low prices, leading to growth in telecommunications usage, leading to lower unit costs and hence lower prices. This would be a desirable scenario for South Africa, in contrast to a situation where the pool of working telephone connections remains confined to a minority of the population and prices remain high.

Q5: Need for and coverage of price control

COSATU is concerned by the Review’s observation at 8.2 that "the first customers to feel the direct benefit of competition are likely to be business customers". The Review’s approach on the issue of the need for and coverage of price controls is permeated by the approach to competition critiqued earlier in this submission. Competition would by no means obviate the need for price controls. It is unacceptable that, according to the Review, expected benefits should accrue to business first rather than to low-income residential consumers. Even amongst businesses, it is doubtful whether SMMEs and rural businesses will benefit from competition. Nor does this take into account the benefits to business and economic development of residential service – for example, greater rural telephone extension will lower the costs to banks of providing services in rural areas.

Q6: Proposal on maximum percentage for individual price increases

COSATU shares the concern expressed in the Review (at 8.6) around individual real price increases of up to 20%, a provision which in practice has harmed residential customers. The Review goes on to suggest a reduction in the 20% rule to a maximum of perhaps 5%. While we agree with the apparent intention of safeguarding residential customers, particularly those reliant on local calls, from excessive price increases, our concern with the proposal is that it would limit the scope for shifting the price structure in future thus "locking in" the current structure to a certain extent. As discussed above. COSATU believes that long distance and international calls should cross-subsidise local calls, and that there should be scope to increase the former costs (significantly if necessary) for this purpose. Possibly a more effective way of achieving the desired objective would be the stipulation of maximum percentage price increases for specific categories in order to protect low-income consumers.

Q7: Telkom’s perceived levels of efficiency

Increased labour productivity – as averred in the Review can arise from various sources including better training, management or commitment from the workforce, an increase in output not matched by increased number of employees, or retrenchments. Outsourcing of services immediately increases the lines per employees measure by reducing the number of Telkom’s employees, without necessarily any improved efficiency. It is not clear from the information provided what has led to the increase in "lines per employee" indicated in Table 5. A limitation of these figures is also that revenue per line and operating costs per line are presented in nominal terms.

Table 6 compares the number of lines per employee for selected countries. As the Review notes at section 9.4, such comparisons can be misleading if not properly contextualised. It should be noted that given South Africa’s relatively low wage rates, inordinately high levels of inequality and extreme labour abundance, it is economically efficient for South Africa to employ more workers per line than in the EU or US for example.

Q8: Quality of service and relationship with price regulation

We would question the assertion at 10.3 that "the general perception seems to be that Telkom’s quality of service is steadily improving, but perhaps not as rapidly as might be the case if it was subject to effective competition" (emphasis added). As discussed earlier in this submission, there is no necessary relation between competition and efficiency or quality of service delivery, and while competition may enhance product choice or even service quality for the upper end of consumers, it may well lead to deteriorated or no service for the less profitable section of consumers.

COSATU supports the suggestion at 10.5 of the regular publication of the main quality of service statistics. We further propose that such reports be tabled at parliament for discussion by the relevant Portfolio Committee.

Q9: Telkom’s profitability and cost of capital

Profitability should obviously not be a central consideration for an enterprise such as Telkom which is responsible for addressing backlogs and meeting basic needs in the telecommunications sector. Notwithstanding this, COSATU believes that Telkom is in fact very profitable, more so than is indicated in the figures presented on page 28 of the Review. Where costs have risen, this is mainly because of major investment programmes (entering the balance sheet as costs) which are depreciated over a relatively short period. The assets financed, however, will yield revenues over a much longer period, as well as adding to the value of the company (and therefore of its owner’s shareholding). The following points should also be borne in mind in assessing Telkom’s profitability:

• Revenue growth has been strong, meaning that lower profits are because costs have been rising even faster.

• The rises in costs are not due to operating costs. Once-off costs have been the reason for higher costs, along with higher finance charges and depreciation. Restructuring costs are not ongoing expenses and therefore serve to depress profits in a particular year, with no implication for the company’s underlying profitability. In a press release, the company’s CEO was quoted as saying that operating cost growth is expected to slow down in the coming financial years (4).

• Finance charges almost doubled to R 2,4 bn in 2000. The higher interest charges reflect Telkom’s increased borrowing to finance capital expenditure in preparation for competition. These charges therefore reflect a strength, and increase the value of the company (and so of the private owner’s shares). Thus overall, Telkom is earning high revenues and its future profitability is being enhanced. The fall in the return on assets ratio in 1998 was due to the sharp rise in total assets, which lays the foundation for future profitability.

• Depreciation and amortisation charges have increased rapidly. This means that Telkom is accounting for the new assets as if they are wearing out rapidly (and so the estimate of their fall in value reduces profits). But, the assets will provide the company with revenue for many years.

• Profitability has increasingly been driven by strong contributions from Vodacom and data services. Data and multimedia revenues increased by 39% to R 3,5 bn in 2000.

• Fixed assets and investments have increased substantially: capital expansion has been achieved mainly through borrowing thus interest bearing debt and interest charges have increased significantly. A huge amount of money has been spent on network expansion, upgrading and expanding data, Internet and broadband networks. This expansion drive increases the company’s future profitability.

This assessment is relevant both to the tariffs and pricing structure to be set, as well as to the future restructuring of Telkom.

It is also relevant to note that unit costs can be reduced by increasing the service provided with existing staff and resources, and not only by reducing employment. The failure to adequately extend services is therefore part of unit cost issues.

We reject the assumption of further privatisation at 11.8. This is a major policy issue which requires proper discussions in the context of overall telecommunications policy.

Q10: Application of CPI measure

We have no specific comments on the issues raised in this section.

Q11: Period of regime

It is reported at 12.5 that Telkom has said that, because of uncertainties around the future competitive and regulatory regime, its business plan does not currently extend beyond the end of the exclusivity period. We find this difficult to believe. For example, its technological upgrading plans reflect estimations of future profits (given their extended length of service). In any event the aim of planning is to address uncertainty, without which there would be little need to plan or strategise.

Q12: Provision in price control formula for unexpected volume changes

We believe that it would be desirable to identify different market segments and set different targets and concomitant penalties and incentives. Such a system would be able to differentiate for example additional volume generated by fixed to mobile traffic (as cited at 12.7) from additional volume generated by a rollout of rural services, and respond accordingly.

Q13: Setting of price controls and financing of universal access/service obligations

We agree with the view expressed in 13.3 of the Review that the current level of X (5) (of 1.5%) appears fairly undemanding in the light of various considerations, particularly the efficiency improvements of around 3-4% that could be considered achievable for Telkom. Having said this, price reductions should obviously not be pursued at the expense of either the accelerated rollout of services nor of the job security, working conditions or wages of the Telkom workforce.

The suggestion (at 13.4) of expressing the productivity factor X as a percentage of CPI does not seem to make sense, particularly at low levels of inflation and with a higher productivity factor. Expressing X as a proportion of CPI would make it impossible to have a negative requirement i.e. for nominal prices to fall, which should certainly be the case if inflation moves close to the 3% target.

It is proposed at 13.8 that competition be introduced for the meeting of universal service obligations by, where appropriate, going out to tender for the provision of universal service in "uneconomic areas" by whoever charges the least for taking on the obligation. A danger with such an proposal is that private operators who initially take on an obligation later fail to properly deliver services or that these are of a poor quality. Private companies will be less accountable to consumers and it is difficult for people to raise complaints or to enforce their rights. COSATU is unclear as to why this is considered preferable to the state – through Telkom – meeting these responsibilities directly. We seek an explanation in this regard, in the absence of which we would have concerns about such an approach.

Q14: Level of X

COSATU would support the increasing of the level of X, in particular for residential consumers. This should be effected as soon as possible.

Q15: Separate pricing for residential services

COSATU supports measures to more strongly cap price increases for residential customers, not just as a measure until greater competition as the Review suggests, but as an important aspect of the ongoing regulation of this sector.

Q16: Timeframe for implementing new regime

No specific comments on this issue.

Q17: Rebalancing and possibility of comprehensive low user scheme

The general patterns discussed in section 14.1 for a relatively high proportion of the bills of poor consumers being rental and local calls, back up our earlier arguments around the need for stronger price regulation of these services. The exceptions cited in 14.2, such as students calling home, do not negate the overall need for cross-subsidisation. The Review makes mention of targeting those in need for special help during the transitional period. COSATU supports the lowering of costs for low-income and other vulnerable groups of consumers. This should not, however, be an interim measure but rather an ongoing aspect of price regulation. While the structuring of price categories (local vs. national etc.) can on balance favour low-income consumers as discussed above, this alone is not adequate as it is a generalised, non-targeting method. Appropriate price structuring should thus be complemented by targeting of low-income and other groups.

Sections 14.3-14.4 discuss the two current sources of assistance for low users, namely the Universal Service Agency (USA) schemes for the provision of low cost access to telephone service, and Telkom’s assistance for elderly and disabled customers and the PrepaidFone service. The Review points to several limitations of these schemes, including the inadequate resources allocated to the Universal Service Fund and the high price of calls under PrepaidFone resulting in low uptake.

There is a need for, on the one hand, properly auditing the success and limitations of these initiatives and addressing the weakness. Secondly, putting in place more a comprehensive cross-subsidisation system, not just for groups like the elderly and the disabled but for low-income consumers in general. Schemes should not just address customers who already have telephones, but also those reliant on public telephones. International experiences from Europe and the US demonstrate the feasibility of allowing consumers a certain number of free minutes after listening to marketing messages. Such a scheme could include public interest information such as around HIV/AIDS awareness.

Another pricing issue which warrants consideration is the tariffs at public phones. Despite the fact that these are overwhelmingly used by low-income consumers who do not have access to private telephones, public phone tariffs are currently higher than those on private phones – the reverse of what the situation should be. Reducing these tariffs is a simple way of increasing telephone affordability to the poor.

We thus support the thrust of the arguments expressed in the section "Basis for a low usage scheme in South Africa". We await more detailed proposals arising from the process outlined in 14.12.

Q18: Access to tariff information for consumers

COSATU would support proposals aimed at greater transparency, accountability, and consumer empowerment.

Q19: Establishing an average residential bill

We have no specific comments on this, except that any analysis should be able to distinguish market segments in order to assess the differential impact of prices or policies and to make decisions accordingly.

Footnotes:

1. International Telecommunications Union, Yearbook of Statistics 2000.

2. A very strong statistical association has been found between equipment investment and economic growth across 88 countries over the period 1960 to 1985. According to this study, the real returns to the economy as a whole are approximately 25 per cent, and could be as high as 35 per cent. But, the private returns are only 15 per cent. The level of private investment which is undertaken will only reflect these returns, suggesting the importance of a role for government if the benefits from investment in infrastructure are to be realised. ( De Long, J B and Summers, L (1993) 'How strongly do developing economies benefit from equipment investment?', Journal of Monetary Economics 32, 315-415)These findings are supported by a study of 119 countries over three decades (1960s-1980s) which finds that public investment in transport and communications is consistently and strongly correlated with economic growth.(Easterly, W. and S. Rebelo (1993) 'Fiscal policy and economic growth', Journal of Monetary Economics 32, 417-458).

3. Kingdon, G. and J. Knight (2000) 'The Incidence of Unemployment in South Africa', paper presented at TIPS Annual Forum.

4. 1 July 1999

5. “X” refers to the targeted real rate of reduction in the average price of a specified basket of services. It is currently set at 1,5%.

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