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