Quixotic price-fixing will do more harm than good in telecoms sector

Instead of dealing with the duopoly, Icasa has not acted and the watchdog has opted for price control

Few would dispute that the cost to communicate should come down, but is regulating prices the best approach or should we be using pro-competition remedies to drive a stronger marketplace that benefits the economy? Consumers will have learnt this past week that the Competition Commission ordered Vodacom and MTN, SA’s largest telecom companies, to reduce consumer data costs as much as 50%. That would have been good news for cashstrapped South Africans, who feel data costs and the general cost of communication are too high in our country. The 1GB data bundle that now costs R150 could soon become R75 cheaper.

But as the news broke, about R22bn was wiped off the value of SA telecom companies. Why should that matter to ordinary working people with no interest in the stock exchange? It should matter because what the Competition Commission purported to give back to consumers with one hand, it took away a thousand times with the other.

In the popular imagination, an investor or shareholder is a wealthy, often white, man in an expensively cut suit, the sort of person you expect to see attending board meetings or company annual general meetings. This is misleading. Nearly all South Africans ordinary working men and women are in fact the primary shareholders in our listed companies.

Take a closer look at Telkom’s ownership structure, for example. The state holds 40% equity in the company on behalf of 58-million South Africans. In addition, another 12% of Telkom is owned by the Public Investment Corporation, which invests on behalf of the Government Employees Pension Fund in many companies across most sectors of the economy. So all South Africans are indirectly shareholders in Telkom, Vodacom, MTN and Blue Label Telecom (which is invested in Cell C). The dividends these companies pay out contribute to the national fiscus to build roads, bridges, homes and schools, and to pay social grants.

Where did this all start? In August 2017, the Competition Commission launched an inquiry into the health or otherwise of competition in the mobile data services market. This arose from persistent concern that SA data prices were high by comparison with peer markets, and that this holds back economic growth in the country because of the centrality of communication services in the modern economy. In its findings after a two-year investigation the commission concluded, correctly, that competition in the mobile communications sector is constrained by the existence of the Vodacom-MTN duopoly, and that this is driving higher costs of communication, not least in mobile data services.

But instead of directing its remedies towards fixing the failure of competition, the commission rather went for the blunt and archaic tool of price control. As in any market, consumers win when prices are as low as possible and service quality as high as possible. Both those factors are driven by fair competition, not regulatory diktat.

Any company that overcharges for its goods and services will be hit by its competitors and consumers in any industry where the competition dynamics operate the way they should. But if that company is a monopoly, or part of a marketcontrolling duopoly, this does not happen. Controlling the duopoly’s pricing may be popular and even appear temporarily effective, but it is tantamount to prescribing a cure for symptoms while leaving the disease intact.

Which brings us to a regulatory failure far more egregious than that of the Competition Commission. We are where we are primarily because the Independent Communications Authority of SA (Icasa), the main sector regulator, has been asleep at the wheel as the duopoly developed and strengthened its grip over the industry, and ultimately the economy. We should not forget that the existence of Vodacom and MTN is the result of deliberate legislative, policy and regulatory action to redesign the landscape of the telecom sector from one dominated by Telkom (then a fixed-line state monopoly) to a diverse, innovative and prosperous sector defined by private sector participation and investment. These actions succeeded, providing the blueprint for how the state and regulators can intervene positively to change the fortunes of an industry.

And yet the state and Icasa have failed to follow this blueprint since then, remaining static as the duopoly developed and failing to use procompetition levers to aid the entry of the likes of Cell C and Telkom Mobile in the same way as it smoothed the path for MTN and Vodacom. This has resulted in untold harm to the SA consumer and the economy. That explains the desperation that has now led the Competition Commission to dabble in quixotic price-fixing.

Some industry commentators have argued that dithering by the government and Icasa over spectrum allocation since 2010 is the reason the duopoly keeps communication costs so high.

This is partly true, but doesn’t tell the full story. In any case, allocating more spectrum to the sector based on its current structure does nothing to fix the competition issues the commission has identified. If you’re not solving the competition challenge, you’re ultimately not doing anything to lower prices.

So what needs to happen? First there needs to be policy and regulatory coherence and alignment. It is concerning that Icasa still has nothing to say on the commission’s damaging threats to the sector.

Second, given our dire economic challenges it is necessary for the state and all its organs to always act in a way that promotes investment and growth. In November, about R350bn in investment pledges were made at the SA investment summit, some of them from the telecom sector. In December, the climate and calculations under which those commitments were made are being significantly altered.

Third, there is an urgent need to adopt a holistic approach to promote pro-competition and pro-consumer regulation. For instance, spectrum allocation must be fair and driven by longer-term developmental needs, not short-term monetary gain; the regulator must promote fair access to sites, take steps to manage and control the costs of infrastructure rollouts, encourage fairer call termination rates that reflect the reality of the industry today, not what it was in 1996; and develop incentives to promote the entry and survival of smaller players (as was done for Vodacom and MTN when they were new entrants).

Price regulation is not the answer. It is an ineffective instrument and may ultimately have unintended and deleterious consequences on employment and future levels of investment. It may ultimately even push smaller players out of the market completely.