Telkom SA Limited 1 Presentation to the Company Forum Local Loop Unbundling: An update Thamsanqa TM Kekana Executive: Regulatory Law 23 August 2012
Historic context on local loop unbundling Policy decision on the local loop unbundling process setout in Government Gazette No. 30308 of 17 September 2007: Policies and Policy Directions drafted in terms of section 3(1) and (2) paragraph 8: I HAVE ALSO TAKEN THE POLICY DECISION that, given the complexity of local loop unbundling process on the one hand and the urgency for South Africa to enable all operators appropriately licensed to have access to the local loop on the other hand, the unbundling process in South Africa should be urgently implemented and completed by 2011. In addition, the Authority should urgently and as appropriate, take advantage of the report of the Local Loop unbundling committee and its recommendations on the proposed unbundling models 2
Regulatory endeavours to give effect to LLU On 22 June 2011 ICASA gazetted a Discussion Document soliciting public comments. Document posed several questions on technical, economic, financial and legal considerations for the implementation of local loop unbundling. 3
Regulatory endeavours to give effect to LLU 4
There are different types of Unbundling Attacker network IP stream (single pt of handover, no colocation) PPPoE ADSL DSLAM or IMAX (concentrator) ATM or Metro Ethernet BRAS IP L2TP ISP component Shared access DataStream (several pts of handover, colocation) PPPoE ADSL DSLAM or IMAX (concentrator) ATM or Metro Ethernet BRAS IP L2TP ISP component Full local loop unbundling PPPoE ADSL DSLAM or IMAX (concentrator) ATM or Metro Ethernet BRAS IP L2TP ISP component
Importance of teledensity The economics Access line deficit The costs NGN trends Copper theft Teledensity in countries wherein local loop unbundling has been implemented has been relatively high, whereas South Africa s teledensity is comparatively low
BRICs experience with local loop unbundling Obligation Imposed on Incumbent Fixed Operator Country LLU Although South Africa must look at its own needs, challenges and experiences, it may be useful to consider how other BRICs countries have addressed similar challenges and whether South Africa can learn and benefit from them. B R I Brazil* Russia India No No No In line with its own identified priority areas including role of telecoms and job creation, South Africa should look at policy lessons from its fellow BRICs-member nations *Despite LLU being mandated, LLU has not been implemented C China No S South Africa Why?
Rationales for LLU and associated hypothesis Rationale Testable hypothesis 1 Promote retail competition Lower retail margins, greater ILEC investment 2 Entry barriers prevent platform competition 3 Stepping stone to facilitiesbased competition Entry by cable, wireless or other providers Conversion from UNE-based to facilities based entry 4 Wholesale competition Competitive access networks, lower access prices In an empirical review of the unbundling experience in 5 countries (New Zealand, United Kingdom, Canada, Germany and United States) Jerry Hausman and Gregory Sidak (2005) found that the rationales for mandatory unbundling were not substantiated in practice. Key Lessons learned: None of the rationales are supported in practice. Rationales 2 and 4 were incorrect in theory while Rationales 1 and 3 were theoretically plausible under certain conditions and assumptions but were not satisfied in practice.
ICASA s unfounded statements... Because Telkom s network is underutilised, LLU will increase broadband penetration; Jobs in the industry will be secured; LLU represents a revenue generation opportunity, including for Telkom New revenue of over R1billion will be shared by operators; and Revenue can be used to fund network expansion. However, ICASA has not: explained what the policy objectives of LLU are; highlighted what the costs are for implementing LLU; done any regulatory impact assessments; provided any empirical evidence or data for its claims; and indicated how this will benefit underserviced areas or poor customers.
The inherent complexities of unbundling MDF blocks & rewiring Splitter banks Frequency test equipment Intelligent Jack Virtual circuit mappings Customer ID? Active customers only? HDF What areas? Network equipment QoS? Product Description Manual vs. Automated? Theft & damage policies? Business rules? Price? Ordering & Contract Number portability Processes Pre-qualification Provisioning & installation Activation Faults Billing Access Frequency Plan Staff Product developers Account managers Loop capabilities Information Call centres Cable Dimensioning Model Systems NNOC Exchanges Sub of full Local loop exist Testing Logical configuration Network configuration CRM Network inventory Field
Added capabilities required for unbundling Loop rehabilitation Construction of SDC Construction of backhaul Operator synchronization Loop inventory (SLA) Sub LU Sub-loop inventory (SLA) Sub- loop management Interlinking SDC s Sub loop I.D. Remote testing D.N Splitter blocks Dual operator Loop pre-qualification Loop identification HDF New blocks MDF rewiring MDF expansion Intelligent jack Frequency plan & management VLAN mapping Dead Full LLU Active Full LLU Shared Access Bitstream with ME hand-over Backhaul capacity provisioning Dual honing ME backhaul DSLAM IPStream IP address management OLO AAA linkage Physical network management Logical network mgmt. Ordering, Faults, Contracts management & Billing
ex ante capital investment for unbundling Upfront investment Description Typical LLU preparation cost, R million Network level costs Register of network information made available to other operators Systems preparation Reference Access Offer Changes to procedures Adaptation of billing system 50 Exchange level Preparation of the sites MDF expansion Building new facility/room when required 200 Customer / line level Copper loop preparation and maintenance Testing of loop to determine or confirm suitability for Broad Band Connection to handover distribution frame Up to R1bn depending on network
Impact of LLU on Telkom s sustainability 2010 / 11 Financials R31.7bn R3.1bn 94% drop in Operating profit* -R3.4bn Operating Revenue Operating Profit R0.2bn Total impact of LLU on profits *Extraordinary items have been excluded from calculations. Calculation also excludes the impact of other regulations at approximately R1.6bn and the impact of Access Line Deficit of R8.7bn.
Regulatory endeavours to give effect to LLU On 6 December 2011 ICASA gazetted a Findings Note setting-out its determinations and conclusions on the proposed phased and sequential implementation of local loop unbundling. Findings culminate the public consultative process for local loop unbundling and sets forth various interdependent and contingent conditions. 14
Telkom 2011 Presentation Title 15
Update on recent developments On 16, 17 and 18 May 2012 the Complaints and Compliance Committee ( the CCC ) of ICASA heard and adjudicated on a referral regarding Neotel s request to Telkom for local loop unbundling CCC ruled that, notwithstanding the absence of a regulatory framework for LLU, Neotel s request was valid and that ICASA had to develop terms and conditions consistent with Chapter 8 of the ECA within 3 months of the 18 May 2012 interim order On 24 August 2012 the CCC rendered a final judgment on the matter ICASA is yet to develop these terms and conditions Telkom is opposed to the implementation of the CCC s order by ICASA and is in the process of considering its options, including further engagements with ICASA
Important Messages... Telkom strongly cautions against the unbundling of the local loop; International practice has shown that LLU is complex and costly to implement; In the SA context with low fixed penetration rates, LLU would have an adverse impact on jobs and investing in the network infrastructure; ICASA ought to conduct a regulatory impact assessment prior to considering the imposition of LLU; and There are alternatives to local loop unbundling Telkom is committed to work with Government to achieve universal broadband access, particularly in nonurban and rural communities.
General conclusions The 2011/2012 Telkom financial results demonstrate that Telkom s revenues are under pressure, profits are dissipating and the fixed-line business is in decline; LLU will undermine the efforts at ensuring a sustainable Telkom; Telkom is currently biggest contributor of public interest in ICT sector (largest employer and infrastructure investor) these contributions would be at risk; Local loop unbundling will jeopardise Telkom s financial sustainability and ultimately put jobs at risk; Planned future network investments are at risk if competitors re granted access at cost-orientated charges which do not allow Telkom to realise an adequate return on investment; There are alternatives to local loop unbundling Telkom is committed to work with Government to achieve universal Broadband access; and Telkom strongly cautions against the unbundling of the local loop.
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