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Interconnection rate drops don't always benefit customers

By   |  March 22, 2006

Decreases in interconnection rates — the amount telecommunications operators charge each other to use their networks — have not always led to reductions in the prices charged to customers, according to a new report Setting Interconnection Prices in Africa, published by Balancing Act.

Author Robert Hall says that although interconnection negotiations should in the main be left to operators, retail price controls should play a larger part in Africa.

In the report he says that evidence of the link between lower interconnection rates and lower rates to the customer is limited. In the case of Kenya, for example, reductions in interconnection rates have not resulted in reductions in retail prices, and the same seems to be true in Tanzania, says Hall.

He does say, however, that “while interconnection rates make up a significant proportion of the retail price, especially for fixed to mobile calls, there are other cost elements involved. In addition, operators will take into account the prices set by competitors, and whether lower prices will result in greater or lesser revenues in the market place.”

Over the last ten years most countries have opened up their telecommunications markets and over the past few years this trend has started to take hold in Africa. Today, competition in the mobile telecommunications market is widespread in Africa and increasingly competition is being introduced into the fixed telecommunications market — for example Nigeria in 2002, Kenya in 2004, and Tanzania in 2005. With multiple operators providing networks, interconnection is essential so that customers on one network can communicate with customers on another network. Without this facility, it is impossible for new operators to start providing any service.

Hall says interconnection is necessary for a competitive market but the prices charged for the carriage of traffic from one operator’s network to another have generated extensive negotiations and disputes in most countries around the world, including Africa.

He says that because even a few tenths of a cent change in interconnection rates make a significant difference to costs and profits for the operators it is not surprising that they bargain hard over the actual numbers.

Typical interconnection rates are around 1 US cent a minute for calls terminating in the fixed network and 12 US cents for calls terminating in a mobile network.

Because interconnection rates usually account for a substantial portion of the final retail price of telecommunications services, if they are very high they push up retail prices and make telecommunications less affordable. It is usually in the interests of governments and national regulatory authorities to see that interconnection rates are kept as low as possible.

Hall says, however, that the linkage between interconnection rates and retail prices seems weaker in Africa than in other countries, and additional regulatory controls on some retail prices may be necessary.

In theory, says Hall, a new entrant to the telecommunications market faces a choice of whether to build its own network or to use that provided by the incumbent operator. It makes this decision on the alternative costs, and interconnection rates are an important part of the calculations, along with the costs of leased lines, transmission links and other related costs. If interconnection rates are lower that the costs of building out a network, the new entrant prefers to minimise its build and to use the incumbent operator’s existing network. High interconnection rates will encourage it to increase its network build, thus satisfying government policies of promoting investment.

High interconnection rates, however, mean increased revenues for the incumbent, which can be reinvested in more network build — at least for the short term. In the longer term, as the new entrant builds out its network, it will divert more traffic on to its own network, thereby depriving the incumbent of interconnection revenues in the future.

“Clearly interconnection rates are part of a complex pattern of investment incentives. Indeed governments may prefer to keep them higher in order to encourage investment, while incumbent operators may prefer to keep them lower in order to protect long term revenues.”

“The new operator has a choice of either using the incumbent operator’s network and paying for interconnection, or building its own network and paying for the costs of network installation and operation. If it is rational, it will adopt the cheaper solution. This will result in lower retail prices for its customers, and will avoid investment in the more expensive solution. It will know the costs of building its own network from suppliers, and if interconnection rates are also based on cost, the new entrant will be able to make exact cost based comparisons and come to a rational decision. If interconnection rates are not based on cost, it cannot make exact comparisons, and it may make a decision that is wasteful of resources.”

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