Telkom SA Limited

Presentation to the Company Forum

Local Loop Unbundling: An update

Thamsanqa TM Kekana

Executive: Regulatory Law

23 August 2012

1

Historic context on local loop unbundling

2

Policy decision on the local loop unbundling process set-

out 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…”

Regulatory endeavours to give effect to LLU

3

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.

Regulatory endeavours to give effect to LLU

4

There are different types of Unbundling

Shared access –

DataStream (several

pts of handover, co-

location)

Attacker network

DSLAM or

IMAX

(concentrator)

ADSL

ATM

or

Metro

Ethernet

IP ISP

component L2TP

PPPoE BRAS

IP stream (single pt of

handover, no co-

location)

DSLAM or

IMAX

(concentrator)

ADSL

ATM

or

Metro

Ethernet

IP ISP

component L2TP

PPPoE BRAS

Full local loop

unbundling

DSLAM or

IMAX

(concentrator)

ADSL

ATM

or

Metro

Ethernet

IP ISP

component L2TP

PPPoE BRAS

• The economics

• Access line deficit

• The costs

• NGN trends

• Copper theft

Importance of teledensity

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

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.

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

Obligation Imposed on Incumbent

Fixed Operator

Country LLU

Brazil* No

Russia No

India No

China No

South Africa Why?

B

R

S

C

I

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

Entry by cable, wireless or other

providers

3 Stepping stone to facilities-

based competition

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.

● 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.

ICASA’s unfounded statements . . .

The inherent complexities of unbundling

Product Description

Processes

Information

Network equipment

Staff

Systems

Ordering & Contract

Active customers only ?

Customer ID ? QoS?

What areas ? Price ?

Pre-qualification

Provisioning &

installation

Faults

Theft & damage policies?

Number portability

Billing

Call centres

Exchanges

Field CRM

Product developers

Account managers

NNOC

Network

configuration

Logical

configuration

Network

inventory

Testing Local loop

exist

Sub of full

Cable

Dimensioning

Model

Loop

capabilities

Access

Frequency

Plan

Virtual circuit

mappings

Intelligent

Jack

Frequency test

equipment

Splitter banks

MDF blocks &

rewiring

HDF

Manual vs. Automated?

Business rules?

Activation

Added capabilities required for unbundling

• Construction of backhaul

• Loop pre-qualification

• Operator

synchronization

• VLAN mapping

• IP address

management

• OLO AAA

linkage

Physical network management Logical network mgmt.

Sub LU Active Full LLU Dead Full LLU Shared Access Bitstream with

ME hand-over

IPStream

Ordering, Faults, Contracts management & Billing

• Backhaul capacity

provisioning

• Dual honing

• ME backhaul

DSLAM

Frequency plan &

management

Dual operator

• Intelligent jack

• MDF expansion

• MDF rewiring

• New blocks

• HDF

• Loop identification

• Sub loop I.D.

• Loop rehabilitation

Splitter blocks

• Loop inventory (SLA)

• Sub-loop inventory (SLA)

• Interlinking SDC’s

• Sub- loop management

• Construction of SDC

D.N

Remote testing

ex ante capital investment for unbundling

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

Exchange

level

▪ Preparation of the sites

– MDF expansion

– Building new facility/room when required

Customer

/ line level

Description

▪ Copper loop preparation and maintenance

▪ Testing of loop to determine or confirm

suitability for Broad Band

▪ Connection to handover distribution frame

50

200

Up to R1bn

depending

on network

Upfront investment

Impact of LLU on Telkom’s sustainability

Operating

Revenue

R31.7bn

Total impact of

LLU on profits

R0.2bn

94% drop

in

Operating

profit*

2010 /

11 F

inan

cia

ls

R3.1bn

Operating

Profit *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.

-R3.4bn

Regulatory endeavours to give effect to LLU

14

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.

© 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

● 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 non-

urban and rural communities.

Important Messages . . .

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.

THANK YOU FOR YOUR

ATTENTION

QUESTIONS AND ANSWERS

19