MTN: we are under regulatory attack

 ·20 Feb 2014

The telecoms industry has spent the last 4 years on a journey towards cost-orientation, regulatory best practice and parity. That journey must continue and MTN fully expects termination rates to go on falling.

But this fall must be informed by a transparent and credible cost study that reflects the costs incurred for all players in the market, including smaller players. This principled process is well known throughout the world and can be executed in a fair and commercially sustainable basis.

MTN’s concern is that there is no cost basis for the new mobile termination rates and more concerning, MTN has not been provided with any insights into the methodology or the cost data that was used by the Authority to compute its new rates.

With such a large impact on its business, MTN believes that it is fit and proper to question the process as a duty towards our shareholders many of whom are empowerment shareholders.

Impact of investment

The MTN 2G network covers an area of more than 800000km2 and our 3G network covers more than 75% of the population and that footprint is increasing on a daily basis.

This means that vast tracts of geographic areas that were previously underserved and citizens that were marginalised have been given the opportunity to become part of the digital age.

All of these improvements in coverage and capacity is to the benefit of the consumer and can only be done when fibre is rolled out and new base stations constructed. We are proud of being able to say that we had a part to play in bridging the digital divide and providing Broadband for All.

MTN has invested more than R26 billion, representing 84% of its profits in network and other infrastructure in the last 5 financial years, and at a time when infrastructure investment was lagging in a wide variety of capital intensive industries.

This investment was driven by our customer demand and the desire to provide the latest digital broadband technology to all citizens of South Africa. MTN has significantly increased its network investment in its 3G and LTE networks so that our customers can reap the benefits of improved coverage and capacity thereby enabling higher data throughput speeds.

MTN has also spent billions of Rands in subsidising the cost of handsets for both our pre-paid and post-paid subscribers. Through our Corporate Social Investment initiatives MTN has also invested more than R300 Million since 2009 in diverse areas such as health, education, establishing computer laboratories at critically challenged schools, entrepreneurship developments as well as responding to socio-economic emergencies with amongst other blanket drives.

There are documented economic, social and employment benefits in ensuring Broadband for All. Every government understands this and all are proposing targets and policies to deliver these benefits to their citizens. South Africa is no exception, and our Government has set very ambitious targets in terms of Broadband for All.

Such ambitious targets will require significant further investment.

Building a Broadband for All future

Securing the hundreds of billions of rands required to deliver Broadband for All is a global race. South Africa will need to compete on the global scale to attract the necessary capital.

The investment needed that underpins the governments’ targets will seek a combination of scale, an enabling regulatory regime and a competitive playing field that fosters risk-taking and innovation.

South Africa, for all its past short-comings, has produced two operators, (one uniquely South African) that have the necessary empowerment credentials and which have the scale (locally and regionally) and financial backing to meaningfully contribute to the challenging government broadband targets.

MTN’s track record has attracted a large body of local empowerment shareholders through its Zakhele share scheme including large institutional shareholders that manage pension monies.

While these operators require no special favours or protection, they have the scale and global muscle to deliver the substantial investment required to maintain, and improve South African’s standing in the global race for Broadband access investment. They should be seen as the government’s ally in delivering growth, not its enemy. Such national assets should be cherished, not vilified.

Unfortunately, MTN South Africa is faced with a sustained level of regulatory attack that appears to be more about levelling out past successes than securing South Africa’s economic future.

What MTN cannot accept is for this cost based principled approach to be reversed for selected players, increasing MTN’s subscribers’ costs, as huge dispensations are handed over on the basis of regulatory experiments or sympathies, however well-intentioned they may appear to be.

If investors are required to divert scarce investment dollars away from South Africa’s Broadband future to subsidise failing voice business plans, then we have to ask what competition is for. The success of a competitor should be dependent upon the correct and most efficient utilisation of resources and not on regulatory interventions that decides who should win or lose in the race.

This decision by the Regulator raises a number of political, economic and practical questions:

  • For one, does it mean that all telecommunications operators should get competitive funding from larger competitors until each of them reaches 20% market share (a practical impossibility)?
  • Should smaller players or later entrants get an even larger subsidy, so they can “catch-up” with everyone even if the smaller operator has been operating for more than a decade.
  • Should MTN also get a higher termination rate so it can grow market share against Vodacom?
  • Which CEO would decide to take its business above 19.99% market share, and lose regulatory protection?
  • What are the guarantees that the subsidy will be spent on securing South Africa’s broadband future, rather than paying off debt or funds leaving the country in the form of dividend payments?

Fighting for the correct process

Since 2002 Telecommunication costs have consistently been the service with the lowest CPI index when compared to 39 different groups of services as published by StatsSA. This is despite substantial increases in basic input costs (with fuel and electricity almost trebling during this period).

MTN supports a continued decline in mobile termination rates, but this decline must be driven by a process that ensures MTRs are reflective of the costs incurred by all players in the market.

There are some commentators that argue that asymmetry is offered to operators based on scale but what is conveniently forgotten is that asymmetry is based on a cost justification and that best practice is only to offer it to new entrants and for a limited time period of 3- 4 years.

The reason for this time limited regulatory cross-subsidy is that there is no incentive for the beneficiary of the aid to become efficient in the market if it can continuously rely on cross-subsidies from its competitors. And what is troubling is that those that have already received this benefit of asymmetrical rates from MTN have been operating for more than 12 years, are now no longer new entrants but are established operators.

More fundamentally, should the larger networks’ customers face higher costs to ensure the smaller network can grow to profitability? Isn’t this the role of risk-capital, rather than regulators?

The less obvious risk with these proposals is that they create a dangerous precedent. Would MTN be allowed to claim subsidies if it made disastrous investment decisions and its market share suddenly crashed below some magical threshold?

Riding on the coat-tails of kings

So far, other than the significant abovementioned investments made by MTN (and its larger competitor) the smaller operators have made very little commitments towards the huge investments required for super-fast LTE, preferring to invoke some downstream regulatory intervention to ride on someone else’s network.

If returns become dictated by regulatory favours rather than innovation and investment, South Africa’s Broadband for All objective will be put at risk and South Africans will ultimately be all the poorer for it.

While regulatory interventions such as the Call Termination rate regulations may be well meaning in the short term, these interventions may have negative long-term consequences for our broadband future.

The poor relative 4G roll-out and take-up in Europe, the take-over of once mighty Nokia by Microsoft, or the interest of AT&T or America Movil in snapping up stakes in over-burdened, slow growth, highly discounted European MNOs, remind us all that well-meant regulatory activism can quickly turn regional mobile leaders into broadband laggards, at huge economic, competitive and strategic cost for the area.

Taking the telecoms industry regulator, ICASA, to court was unfortunately the last resort for MTN after concerted efforts to engage constructively and in good faith with the regulator failed.

MTN is in agreement with the Communications Minister, Yunus Carrim, in that it is regrettable that the issue ended up with the Court and would have preferred the matter to been resolved through negotiations with ICASA.

However, MTN would like to emphasise again that the court action which has been initiated was a last resort after all other avenues had failed.

By Zunaid Bulbulia: CEO, MTN South Africa

More on Icasa

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