1. Portfolio Committee on Communications
Convergence Bill
Presentation to the
Portfolio Committee on Communications
21 June 2005

2. Roadmap DEFINING THE ISSUE. HOW DID WE ARRIVE HERE?
WHAT SHOULD BE DONE?
LEGAL AND CONSTITUTIONAL ARGUMENTS.
CONCLUDING REMARKS.

3. DEFINING THE ISSUE

4. Policy Choice at the heart of Convergence Bill (“CB”)
CB OBJECTIVES
Universal access
Affordability
Broad industry consensus
VEHICLE
Competition
IMPLEMENTATION CHOICE
LIBERALISATION
REGULATION
Remove legal barriers to invest – “full liberalisation”
An objective framework with open access as a remedy
Intervene to correct market failure
Regulate terms of entry – “managed liberalisation”
A biased framework with open access as a central mechanism
Intervene to create arbitrage opportunities
Investment in new access
Access to existing investment
Different types of competition =
different outcomes
Connect more people at a fair price
Deliver lower prices to those already connected
Which flavour of competition does South Africa need?

5. Convergence Bill - Regulation and Liberalisation
Convergence Bill retains the “managed liberalisation” approach and so introduces regulations that:
Encourage Communication Service Providers to free-ride on existing infrastructure rather than build their own.
Deliver price arbitrage (lower usage prices) rather than increased connectivity (universal access).
Regulate the competitive mobile sector like the fixed monopoly on the basis that they both provide infrastructure.
In choosing regulation to deliver competition, the Convergence Bill may:
undermine the government policy objective of universal access
undermine further investment in the mobile sector
fail to protect existing licensees rights and investors
The “regulated route to competition” is problematic !!!

6. Impact of Current Direction of Convergence Bill
In the Convergence Bill, fixed and mobile are regulated on the same basis because they provide an “essential facility”, notably, a scarce infrastructure.
In fact, scarcity of infrastructure is a regulatory creation, e.g., licence scarcity.
Regulating infrastructure per se leads to:
Onerous access obligations on competitive mobile investment.
Reduction of investment in network coverage and density by infrastructure licensees.
Regulating instead of allowing the market to deliver.
Encouragement of free-riding.
Less scope for differentiation and so less competition!
South Africa may be sacrificing connectivity objectives against short term gains for those already connected

7. Should Competitive Markets be Regulated like Monopolies (i)?
Mobile is South Africa’s telecommunications success story
Penetration
Employment
Social cohesion
Universal service
Coverage
Network Stats – March 2005
Land Coverage – (total land area – ) = ± 69% Covered
National Road Coverage – (total roads – ) = ± 97% Covered
Sea Coverage – sq km
Population Covered – ( total pop – ) = 92% Covered
Towns Covered – 92%Covered
Cities Covered – 100% Covered

8. Should Competitive Markets be Regulated like Monopolies (ii)
Should Competitive Markets be Regulated like Monopolies (ii)? Mobile Retail and Wholesale Rates are Competitive.
Retail
Wholesale
Source: ITU, African Telecommunications Indicators, 2004
Source: Independent Regulators Group, MTN
Competition is delivering. Although no price is too low for consumer groups, policy makers need to balance low prices with investment and connectivity

9. HOW DID WE ARRIVE HERE?

10. Absence of Policy Framework
Industry and PPCC find themselves making policy choices while drafting the Convergence Bill.
Symptomatic of a lack of a coherent policy debate prior to the drafting of this version of the Convergence Bill.
Industry contributed to earlier drafts of the Convergence Bill, but the Bill under consideration has shifted radically from the earlier versions.
Process means we are “making it up as we go along” – not an appropriate way to decide the ICT future of South Africa.
A Green and White Paper process would be the appropriate route to underpin the Bill

11. Significant Market Power (i)
MTN is concerned with a market share intervention threshold, in this case 35%, because the threshold creates:
Market distortion behaviours, encouraging players to manage growth to escape regulation; and
Asymmetries in regulatory treatment which are not economically justifiable (a 35% market share operator is regulated the same as a 100% monopolist).

12. Significant Market Power (ii)
MTN proposes that:
Market share thresholds should be replaced with economic analysis;
Alignment of SMP with competition law concept of dominance – eg. a 35% share only constitutes a presumption of SMP followed by an economic analysis based on competition law principles;
Convergence Bill should issue guidelines on SMP analysis for ICASA addressing market definition, market power, and market share computations; and
A list of pre-defined “relevant markets” should be developed by ICASA, after consultation with industry, for ex-ante SMP analysis against a predetermined criteria. Examples of these relevant markets could be:
Retail
Access to a public telephone network for residential and non-residential customers; and
Publicly available local and national telephone services for residential and non-residential customers.
Wholesale
Call origination on the public telephone network;
Call termination on individual public telephone networks; and
Broadband access.

13. Essential Facilities (i)
MTN disagrees with the proposition that market concentration is an indication of the essential nature of a good.
Market concentration is a function of cost structures and/or regulatory restrictions and is not an indication of whether goods produced are essential or not (e.g. airplanes manufacturing).
Doctrine of essential facilities has been abandoned in other jurisdictions.
Instead inputs highly relevant for competition are made eligible for ex-ante regulation by inclusion in the list of “relevant markets”.

14. Essential Facilities (ii)
MTN proposes that:
References to essential facilities should be removed from the Bill;
Facilities seen as essential should be considered to be relevant inputs and included in the list of markets for SMP analysis; and
Where SMP is found relating to the provision of such inputs, proportionate regulatory remedies should be invoked. These remedies could, inter-alia, include:
Transparency.
Non-discrimination.
Accounting separation.
Price controls, including obligations of cost orientation and cost accounting systems.

15. Cost based Interconnection and Facilities Leasing
Cost Based Interconnection & Facilities Leasing provisions
Mobile Call Termination Regulation
(Cost-based) Access to Mobile Facilities
Pre-pay ARPU
Investment choices:
invest R millions in own infrastructure;
commercially negotiate access; or
free-ride on existing infrastructure using regulations
Break-even point
Keys:
Inbound revenues
Outbound revenues
Pre-regulation
Post-regulation
New entrant
Low mobile users receive more calls than they make…
…so penetration of poorest depend heavily on inbound ARPU.
Regulating inbound could make many low users unprofitable…
…leading to higher outbound prices, lower handset subsidies and lower penetration.
Given the choice of investing or free-riding, any rational investor will use the regulatory, free-riding route
So liberalisation on a cost-based access basis attracts no new infrastructure investment.
Cost-based access only required for bottleneck monopoly situations.
Applying cost based Interconnection and Facilities Leasing provisions to mobile could lead to less investment, lower penetration and higher prices.

16. WHAT SHOULD BE DONE?

17. Liberalisation on an Objective Basis
Remove legal barriers to investment
Sole constraint to licensing is scarcity, e.g, spectrum.
Limit the scope of ex-ante intervention
Remove “essential facilities” and replace by a list of “relevant markets” for economic analysis by ICASA using Competition Law principles.
Replace automatic essential threshold with economic analysis
market share should only trigger a rebuttable presumption of SMP – Burden of proof would lie with the operator to prove that it does not hold market power , applying competition law principles.
Deploy proportionate remedies
Use the minimum necessary intervention to correct the market failure – an assessment that can be appealed.
Issue a set of guidelines on relevant markets, SMP and remedies
Our proposition is not to “leave mobile alone” but to “intervene on a sound economic basis” to correct market failures.

18. LEGAL AND CONSTITUTIONAL ARGUMENTS

19. Licensing and Protection of Existing Rights
MTN is concerned with the following problematic areas in the licensing provisions of the Convergence Bill.
Section 5 (4)&(5) of the Bill empower the Minister, without extending similar protection to service licensees, to prevent the entry of further network service licensees into the market for an unspecified period.
Section 5 (9) makes provision for individual and class licences to be issued for 25 years, but is silent on the validity period of converted licenses.
Section 89 (4) gives ICASA unfettered powers when converting license to grant additional rights with commensurate obligations.
Bill is silent on protection of vested rights of incumbent operators as set out in ss32A(5) and 37(4) and their rights are being eroded without the feasibility study required by the Telecommunications Act.
Negation of the statutory and licence rights of incumbent operators may be unlawful and unconstitutional.

20. CONCLUDING REMARKS

21. Conclusion
There are two means to achieve competition, notably, liberalisation or regulation.
The regulated route chosen in the Convergence Bill is problematic. It may deliver lower prices to the connected, but this would be at expense of the un-phoned.
MTN’s proposal is liberalisation within an economically sound regulatory framework to deliver both policy objectives of access and affordability.
Think of the unintended consequences of economic value destruction if policy framework is unclear and problematic from the perspective of an investor.
Detailed amendment proposals accompany this proposal.