New licence fees dreaded by South Africa’s VANs

Mergers, Acquisitions and Financial Results

The proposed licence fee structure for new telecommunications licences could put a damper on the victory celebrations of smaller value-added network service providers (VANs). They could now see themselves hammered by up to a 30-fold increase in their licence fees.

The telecoms industry recently hailed a landmark court ruling, opening the door for VANs to self-provide, as the first real step towards true liberalisation. However, some now fear the new licence structure – under the Electronic Communications Act – could be yet another setback in their drive to compete equitably within the local telecoms industry.

This comes as the Independent Communications Authority of SA (ICASA) proposes that the annual variable licence fee be increased 30 times, to 3% of gross revenue.

The proposed telecommunications licence fee structure, currently being finalised by the regulator, presents a conundrum of balancing out historical legacies and ensuring a fair playing field.

Current draft discussion documents on the new structure could mean some operators may see a huge hike in their annual licence fees and others could see theirs being unaffected, or actually reduced.

For instance, if the current draft documents become regulation, then Telkom could see its licence fee shoot up by 2 500%, while cellular network operator Vodacom could see its annual licence of 0.5% of its turnover be reduced.

This discrepancy is due to Telkom being awarded its licence during its monopoly period, while cellular network operators were awarded their licences far later – at the beginning of the so-called “managed liberalisation” period.

The new licence fee structure will hit the fixed-line operator far harder, as the new licences allow for a far greater ability to choose and select the types of services operators wish to offer and how they wish to do it.

VANs currently pay 0.1% of their annual turnover derived from licensed activities to ICASA, plus another 0.2% to the Universal Service and Access Fund (USAF).

“If ICASA's proposals are turned into regulations, then VANs, who accept I-ECNS [individual electronic communications network service] licences, are likely to see their annual licence fees rise 30-fold. Then there is the possibility the USAF contributions could rise to a full 1%, meaning that up to 4% of their annual turnover from licensed activities will be paid for just participating in the sector,” says an ICT lawyer involved in discussions around the fees.

He says this could put smaller VANs, which often operate on a tight profit margin of around 13%, under severe strain.

John Holdsworth, CEO of ECN Telecommunications, a company that wants its I-ECNS licence, says the increase in licence fees for the smaller VANs that will now enter the market, will mean it is an additional cost that will have to be passed on to customers. This will not bring down the cost of telecoms as it increases the cost of doing business, he notes.

“It is another tax on business. Self-provisioning [the right to build their own networks] is not the only reason for getting an I-ECNS licence. It also gives us the same rights as the incumbents, such as geographic number portability and the right to have our own numbering range,” he says.

ICASA has committed itself to issuing the new licences by 19 January and acting CEO Masie Mamaregane says the fee structure should only be completed by March.

Mamaregane says the proposed licence fee structure is based purely on economics and has nothing to do with the politics of issuing the licences.

Another factor in the debate is that industry is of the view that licence fees should be charged in relation to the cost of regulating the sector, and that ICASA is just acting as another tax collection point.

ICASA's annual report shows that, in the 2008/9 financial year, it collected R2.1 billion in fees that went straight to National Treasury, while it received only R250 million as its budget.

However, ICASA staff say a licence fee charged for covering the cost of regulating would in effect be an administration fee, while, in reality, many other countries treat it as a tax.

The regulator contends that I-ECNS licence conditions are generous as a holder has the right to build a network, choose a frequency from the national spectrum, subject to availability, and participate in the national numbering plan.

“Furthermore, the licence-holders will only have to start paying their fees once they have completed building their networks and are now making money from it,” says an ICASA staff member.

ITWeb