Telecommunications prices in South Africa: An international peer group comparison

In 2004, following a challenge from President Thabo Mbeki to South African business leaders to help identify major business opportunities for the country, the South Africa Foundation commissioned a report from McKinsey and Company into Business Process Outsourcing and Offshoring (BPO&O). The study was co-sponsored with the Department of Trade and Industry/TISA, Johannesburg City Council/EDU and ComMark Trust. It found that indeed a major opportunity existed for South Africa to enter the BPO&O industry more vigorously. Yet, a major inhibiting factor to realise the sectors potential was the exorbitant cost of telecoms in South Africa. Consequently the South Africa Foundation commissioned a study of South African telecommunications prices, as compared to international prices, in the pursuit of its core mission of promoting enterprise and an environment conducive to the conduct of business.

The study proceeded from the goal of assessing how close to or how far from the competitive, or best practice, price benchmark South Africa is, on the basis that there is no innate reason why South Africans should not have access to telecommunications services at that benchmark price level. Thus South Africa was compared to a best-practice peer group of 15 countries, including both developing and developed countries. The pricing evidence suggested that Telkom’s pricing structure is excessive, and that some sort of intervention in the market may therefore be appropriate. More competition in the sector is critical at all levels, and all forms of competition should be encouraged. However, telecommunications is an industry characterised by natural monopolies. Thus, in certain sectors of the market, it may not be possible to increase competition, and prices will tend towards their monopolistic level. In these sectors it may therefore be necessary to introduce more effective regulation.

At least two crucial issues regulatory issues were identified. Firstly, the high pricing of international bandwidth needs urgent attention. Secondly, the playing field between Telkom’s VANS services and those of its competitors needs to be leveled. This could be accomplished by, for example, the establishment of a wholesale pricing division within Telkom.