Interconnection Public Seminar Final

Interconnection Rate
Benchmarking
Namibia

Dr. Christoph Stork

Tuesday 28 July 2009

Namibia’s Success Story:
9 months from dispute to resolution
October 2008: Minister of ICTs Joel Kaapanda hosts a
workshop to address an interconnection workshop
between telco operators. Operators agree to conduct a
benchmarking study
January 2009: NCC commissioned Research ICT Africa to
conduct a benchmarking study
June 2009: NCC prescribes new termination rate ceiling of
N$ 0.60 with glide path to N$0.30 by January 2011


Table of Contents
Interconnection background
Situation in Namibia
Benchmarking termination rates & trends
Benchmarking cost of termination
Namibian benchmark model
Conclusion


Termination rates
What operators charge each other for terminating
a call for the other network
Example: A Vodacom customer calling a CellC
customer
Vodacom collects the revenue from its customer
CellC has a cost, the cost of terminating the call on its
network
Vodacom pays CellC a termination charge to compensate
for that cost


Why Regulate Interconnection?
Each operator holds a monopoly for termination on its network
Incumbent may seek to limit competition and preserve its market
power:
Refusing to interconnect
High prices that make it difﬁcult for new entrant to compete
“Sabotage” by providing a lower quality interconnection service
Regulatory intervention can lead to a more efﬁcient outcome
ITU: Interconnection = single most important problem in the
development of competitive telecom sectors


International trends and best
practice
International best practice: Termination rate = cost of
termination of efficient operator:
Promote economic efficiency
Provide incentives to invest in new technologies to reduce costs and
expand service offerings
Promote competition
Promote universal service (through low retail prices)

NGN / IP based voice traffic will become
insignificant...new pricing principles RPNP... SKA


Interconnection Price - Too Low
Below cost recovery of terminating network
Often sited: Incumbent operators may not invest in the
network or maintain its quality. However...
Operators build their networks to make money off their
subscribers
Termination revenue makes up around 10% of total revenue
Receiving party beneﬁts from the call too, therefore the
terminating network provides a service for own subscribers
However, SKA can lead to undesirable arbitrage in CPNP


High Interconnection Prices
Customers pay more than they need to
Incumbent can prevent new entrants from gaining market
share
New entrants need to compete with their off-net rates against
incumbent’s on-net prices
High termination rates can prevent them from doing that
Incumbents high off-net price makes it expensive to be
called for switchers
Causing trafﬁc imbalance
Net termination payment outﬂow of new entrant


Beneﬁt of size:
Customer Switching has Initially mostly on-net calls ie MTC to MTC calls
After switching mostly off-net call eg CellOne to MTC

Switch

MTC
CellOne


Approaches
Industry Consensus
Regulatory Intervention
Cost based
Benchmarking
SKA or Bill and Keep
Retail minus pricing


Situation in Namibia


The best outcome for Namibia
Fair competition among telecommunication
operators
Lower consumer prices
Better services
Maximum job creation
Highest income for government through company tax
and individual income tax
Reasonable returns for shareholders / Investors


Competition has been good for
Namibia and MTC, it needs to be fair
to new investors as well!
OECD Price basket
MTC 2005 2008
;:1<=10>!3?;!@1=>17A12!#++B!
;:1<=10>!3?;!CD>-A12!#++%!
;:1<=10>!3?;!E1D17A12!#++"!
subscri
400,000 1 million !#()$*!!
bers
!#*($%!!

!&%'$%!! !&%($+!!
net proﬁt 293 358 !&*%$+!!
after tax million million !&&($+!!
!"#$%!! !%($'!!
!%+$+!!

302
Staff 364
(2006) ,-.!/012! 314567!/012! 859:!/012!


Legal Requirement for Termination Rates
MTC’s and CellOne’s Licences
New ICT policies
New telecommunications Bill (passed by parliament
in July 2009) all require that termination rates are:
Cost based
Transparent
Sufﬁciently unbundled
does not pay for network components or facilities that it does
not require for the service


CellOne and SWITCH cannot compete with their
off-net rates with MTC’s on-net prices
F#GC$&'8$:H' F#GC$&'FI'8$:H' F#GC$&'FI'FI'8$:H' J<K'

!"##$%&'()' !"##$%&'()'' !"##$%&' !"##$%&' !"##$%&' !"##$%&' !"##$%&' 8."9$,,+"#:;' <:#="'>$.' /-,+"#'(?' /-,+"#'@?' <:#="'A:B' <:#="'>$.' <:#="'D$5$#'
*$+,-.$' /.$$0"1'' 2))'*$+,-.$'' 2))'3%45$'' 6()' ())'' 2)))' 1+#-&$' :#0'C+=7&' ,$%"#0' &"'<E$;5$'
3%7+$5$.'' 8+"#$$.''


MTC’s fixed retail rates are causing traffic
imbalance and net termination payment outflow for
Telecom Namibia...starving the fixed line network
Peak Fixed Retail Price as multiple of FTR
MTC Connect 50 Leisure 365%
MTC Connect 50 Freedom 365%
MTC Connect 100 Leisure 365%
MTC Connect 100 Active 310%
MTC Connect 250 Achiever 310%
MTC Connect 500 284%
MTC Connect 1000 Pioneer 259%
MTC Professional 310%
MTC Tango per minute 532%
MTC Fusion 59 397%
MTC Fusion 39 397%
MTC Tango Day and Night 397%
MTC Tango per second 571%
MTC Tango Seven to Twelve 397%


MTC CellOne Telecom Namibia

11.2%

9.8%

6%

Termination revenue as share of total revenue


Interconnection net payments in N$ million
(Source: Telecom Namibia and CellOne)


Trafﬁc imbalance (minutes)


Fixed-Mobile Convergence
MTC’s Home Phone: cheaper prices for On-Net calls
compared to a mobile subscriber but mobile retail rates
when called
Differences between mobile and ﬁxed termination rates
favour mobile operators in offering converged services,
using mobile termination rates to subsidise the on-net retail
rates
Converged termination rates stimulate converged solutions
and prevent bias towards mobile operators (Tanzania and
Uganda)


Playing field is not level
Termination rates are neither cost based, nor transparent nor
sufficiently unbundled
MTC has on-net rates that are below MTR: it makes it impossible
for CellOne or Switch to compete on price
High Off-net and fixed-line retail rates deter MTC’s customer to
call CellOne, Switch or Fixed, causing traffic imbalances and
interconnection payment out flows from CellOne and Telecom
Namibia
Lacking number portability
High Once-Off fee for CellOne N$65.3 million


Namibia needed to be pragmatic
about interconnection regulation
The direct regulatory costs of a detailed forward-looking cost
regime is signiﬁcant:
Operators may hire engineers, economists and lawyers to put forward their views
Regulator must have enough resources to assess competing claims about cost
There may be costly dispute resolution processes
Accounting separation may needed to be pre-scribed which is time consuming and
expensive

No guarantee that detailed cost estimation approaches will be
accurate
NCC has only 7 staff members and part-time commissioners


Benchmarking termination
rates & trends


EU Recommendation
7 May 2009
Objectives of regulation:
Technological neutrality
Preventing distortions and promoting competition
Deliver maximum benefit for consumers (choice, price and quality of service)
Termination rates should be brought down to the cost of an
efficient operator - Cost Model:
Bottom-up LRIC, only taking into account cost that are caused by the
provision of wholesale call termination (the increment)
Mobile and fixed core network based on NGN
Mobile access network based on a combination of 2G and 3G
Asymmetric termination rate for max 4 years: if incremental unit costs higher


Termination Rates April 2009 MTR N$
India 0.04
Cyprus 0.24
Austria 0.54
Sweden 0.55
Finland 0.59
Kenya 0.62
Tanzania 0.63
Botswana 0.71
Slovenia 0.77
France 0.83
Uganda 0.86
UK 0.93
Namibia 1.06
South Africa Peak 1.25
South Africa Off peak 0.75


Termination Rate Trends in Euro cents
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0.2

Mobile Termination Rates
0.15

0.1

0.05

0
0 125 250 375 500
Population density 2006


Benchmarking Cost of
Termination


WIK 2007 study for Australia:TSLRIC
Market Share 17% 25% 31% 44%

Coverage 96% 96% 96% 96%

WACC 11.68% 11.68% 11.68% 11.68%
A$ N$ A$ N$ A$ N$ A$ N$
Cents Cents Cents Cents

Voice On-Net 13.4 0.93 10.7 0.74 9.6 0.66 8.9 0.62

Voice Termination 7.3 0.51 5.9 0.41 5.3 0.37 5 0.35

Voice Origination 6.4 0.44 5.2 0.36 4.6 0.32 4.2 0.29

Termination share 54.48% 55.14% 55.21% 56.18%
of on-net


Analysys 2007 study for PTS in
Sweden based on LRIC

2008-09 2009-10 2010-11 2011-12 2012-13
Sweden
Based on SEK 0.358 0.275 0.227 0.201 0.183
costs of
highest N$ 0.449 0.345 0.285 0.252 0.230
operator
Based on SEK 0.213 0.204 0.175 0.144 0.125
costs of
N$ 0.267 0.256 0.219 0.181 0.157
lowest
operator


2005 2006 2007 2008 2009
Austria
Operator 1 Euro Cents 6.67 5.69 4.40 3.40 3.08

N$ 0.80 0.69 0.53 0.41 0.37


N$ 1.55 0.77 0.78 0.41 0.33


N$ 1.55 1.23 0.49 0.29 0.23


N$ 1.94 1.50 1.00 0.55 0.33

Operator 5 Euro Cents 11.64 8.41 8.74

N$ 1.40 1.01 1.05


01- 01- 01- 01- 01-
Tanzania Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

LRIC+ equi - Real 2007 US 7.15 6.88 6.63 6.51 6.39
proportionate cents
Mark-Up
(EPMU)
Nominal US 7.30 7.18 7.08 7.12 7.16
cents

N$ 0.60 0.59 0.58 0.58 0.59

Glide Path for Nominal US 7.83 7.65 7.49 7.32 7.16
MTR &FTR & cents
international
incoming
N$ 0.64 0.63 0.61 0.60 0.59


Mobile termination costs Namibia (N$/ZAR):
MTC being the most efﬁcient operator
Current MTR 1.06

MTC total expenditure per minute 1.02

MTC opex per minute 0.97

MTC direct cost and depreciation per minute 0.48

MTC direct cost per minute 0.34

MTC 50% of dircet cost and depriciation per minute 0.24


Mobile termination cost per minute in N$
Tanzania LRIC + mark up 0.59

Australian Efficient Operator (44% market share) 0.35

Swedish Efficient Operator 0.26

French Efficient Operator (upper level) 0.24

MTC’s estimated cost of termination 0.24

Austrian Efficient Operator 0.23

Telecom Namibia’s estimated cost of termination 0.14

French Efficient Operator (lower level) 0.12


Namibian Benchmark Model


Termination Rates should be
Based on cost of an efﬁcient operator
Technologically and service neutral
Facilitate emergence of IP-based NGNs
Should be implemented in terms of the
current licence condition and acts


Benchmarking Models
The proposed termination glide path = ceilings:
Operators would be free to negotiate for lower
rates:
Model 1: Immediate drop to N$0.30
Model 2: Symmetric glide path to N$0.30 starting 1 July 2006
Model 3: Symmetric glide path to N$0.30 starting 1 July 2009
Model 4: Asymmetric glide path to N$0.30 starting 1 July 2009


CellOne Telecom Namibia MTC
Model 1: Immediate 2nd choice: if 2nd choice: Removing No comment
N$0.30 accompanied by other distortionary factors immediately
regulatory but request higher transit charge
interventions for outgoing international calls

Model 2: Symmetric 2nd choice: if 1st choice: Compensates for No comment
glide path to N$0.30 accompanied by other market distortions of past
that started 1 July regulatory years
2006 interventions

Model 3: Symmetric Rejected: sees no Rejected: only gradually No comment
glide path to N$0.30 reason to wait to removes market distortions and
starting 1 July 2009 remove market disadvantage TN and consumers
distorting factors unjustifiably for two years longer

Model 4: Asymmetric 1st choice: because Rejected: only gradually No comment
glide path to N$0.30 of current traffic removes market distortions and
starting 1 July 2009 imbalance disadvantage TN and consumers
unjustifiably for two years longer

MTC model: Rejected: same as for Rejected: same as for Model 3 Otherwise: Drop
reduction to N$0.60 Model 3 in EBITDA margin
until 2011 to 37% because
of having to
compete on a
level playing field


After several consultations with
all operators: Industry consensus
Immediate drop of termination rates to N$0.60 to catch
up with the region and international developments
Glide path to the estimated cost of an efﬁcient operator
+ 25% mark-up, ie NS0.30
Immediate ﬁxed-mobile convergence of termination
rates
It gives time to MTC and CellOne to conduct LRIC
studies and contest the results


Compromise Model
Current 1 July 2009 1 January 1 July 2010 1 January
2010 2011
MTR 1.06 0.60 0.50 0.40 0.30

FTR 0.63 0.60 0.50 0.40 0.30

Originating 0.59 0.60 0.50 0.40 0.30
internationally,
terminating locally
via Telecom
Namibia
Originating in Government 0.60 + 0.50 + 0.40 + 0.30 +
Namibia and Gazette international international international international
terminating settlement settlement settlement settlement
internationally rate rate rate rate


Net termination payment ﬂow in N$ million
for 2008 assuming unchanged retail prices
and trafﬁc for N$0.6 and N$0.3
CellOne Telecom Namibia MTC
91.5

46.46
23.23

-2.6 -1.97 -0.98
-22.25
-44.5

-88.9

Current TR TR N$0.60 TR N$0.30


MTC EBITDA Margins
MTC current 49.9%

MTC direct impact of MTR N$0.60 48.1%

MTC direct impact of MTR N$0.30 47.4%

Vodacom South Africa 34.6%

MTN South & East Africa 34.4%

Orange UK 20.3%

Orange Spain 15.1%


CellOne and SWITCH off-net rates compared to MTC’s on-net
rates at MTR N$0.60, assuming cost saving is passed on

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!%#),!! !%#)+!!
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CellOne and SWITCH off-net rates compared to MTC’s on-net
rates at MTR N$0.30, assuming cost saving is passed on
?0AK! LM!?0AK! LM!LM!?0AK! NCO! -0BBL/0!LMP/02!! IJ421>!LMP/02!!

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Recommendations for
operators
Cellone and Switch: Minimum requirement= Set
off-net price at 2*MTR until it is on par with on-net
prices
CellOne: reduce call rates to ﬁxed lines to 2*FTR
until it is on par with on-net prices
MTC has a complex pricing structure. Minimum
requirement= Fixed or Off-net calls should be On-
net rate + MTR/FTR


Likely Consequences
Fairer competition will lead to lower prices and better services
for consumers
The market will expand and Namibia will have more subscribers
Namibians will be able to communicate more
Investment in the sector will increase
The sector will employ more people and contribute more to
Namibia’s economic growth
MTC’s EBITDA margin will only be slightly affected despite lower
market share due to increase in mobile users and mobile usage


Conclusion 1
Regulators across Europe and Africa agree: Termination rates
should be based cost of an efficient operator
This prepares the markets for a smooth transition to IP based
Next Generation Networks
Symmetry between mobile and fixed termination rates supports
fixed-mobile convergence and removes distortions that would
advantage mobile operators
Asymmetric termination rates are unsuitable to facilitate market
entry - more effective tools exist that do not lead to economic
distortions and enshrined traffic imbalances


Conclusion 2
The compromise model removes several market distorting
factors
The glide path will bring termination rates down to the cost of
an efficient operator
Converged termination rates set the scene for fixed-mobile
convergence
Continuous monitoring of the sector by regulator is required
Other regulatory measures may be required to level the
playing field further


Conclusion 3
Implementing cost based termination rates (LRIC eg) is
a challenge for many developing countries requiring
adequate legal powers and institutional capacity
Benchmarking provides a fast feasible solution if cost
data and support is available from other jurisdiction
Something regional regulatory bodies should look into


How was this possible in 9 months?
Visionary Minister for ICTs, Joel Kaapanda
Dedicated NCC commissioners
Co-operation from African and EU regulators:
Botswana Telecommunications Authority
Communications Commission of Kenya
Instituto Nacional das Comunicações de Moçambique
Tanzanian Communications Regulatory Authority
Uganda Communications Commission
Rundfunk & Telekom Regulierungs GMBH (Austria)
Swedish Post and Telecom Agency, PTS


Thank You!
Report can be downloaded from:
http://www.ncc.org.na
Publications tab


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