The introduction of lower interconnection tariffs by Mozambique's Communications Regulatory Authority (INCM) late last week and recent public hearings on proposals to do the same in neighbouring Tanzania, by the Tanzania Communications Regulatory Authority (TCRA), are well placed according to telecoms industry analysts.

Dobek Pater, Director at Africa Analysis says a reduction in interconnect rates often results in reduction of retail tariffs for consumers.

"Although retail tariffs are normally not regulated, the reduction in wholesale costs (through interconnect rate reduction) can impact retail tariffs positively (for users) when operators reduce tariffs for off-net calls. The reduction in retail tariffs is normally a bit lower than the reduction of the interconnect rates, in monetary terms."

The new rates for Mozambique were published in the country's government publication Boletim da República for the period 2017 to 2020. The reductions will be phased in at 0.48, 0.43, 0.39 and 0.37 meticais per minute for the years 2017, 2018, 2019 and 2020 according to INCM.

Tanzania's TCRA proposes a reduction of the voice call termination rate per minute to TZS 15.60 for 2018 and then even further to TZS 10.40 on the first day of January 2019 and then to TZS 5.20 in 2020. The proposed rates for 2021 and 2022 are TZS 2.60 and TZS 2.00 respectively.

Pater adds that market regulators normally aim to reduce interconnect rates so that they are cost-based. This means that operator A should not charge operator B in interconnect rates more than what it costs in equipment, admin, etc. to handle the traffic coming from operator B network onto the operator A network.

"Operators should not be releasing any profit on interconnect charges. This has already been achieved in many more developed markets, but not in most markets in Africa although there are some exceptions that have achieved it, or close to it. Also, smaller operators are often granted asymmetry by the regulators. This means that a smaller operator can charge higher interconnect rate per minute to a larger operator than vice versa. The objective is to reduce the imbalance in payments between smaller and larger operators, so that smaller operators are not disadvantaged financially too much in this market."

Implications for MNO profitability

On whether the reduction of interconnect fees will harm the bottom line of operators running their business in Mozambique and Tanzania, Pater says this will depend on the operator.

"Large operators are often net receivers of interconnect revenue, while small operators are net payers of interconnect revenue. This means that the large operators generate larger revenues (and profit) from interconnect, while small operators end up paying (losing money) on interconnect on a net basis...for example, in South Africa, Vodacom (the large operator and gainer from interconnect) used to receive around R6 billion annually in interconnect revenue. Since the reduction of interconnect rates over the past several years, Vodacom's interconnect revenue has been reduced to around R1 billion annually."

Arthur Goldstuck, Managing Director of World Wide Worx says mobile network operators (as seen in South Africa) have an interest in keeping the interconnect fees high or unregulated as it is highly profitable for them, although it is punitive for the consumer making it necessary to avoid profiteering by the MNOs where it is not necessary.

"In South Africa, it was used by the two major operators to limit the effectiveness of a third operator's entry into the market. The regulator allowed the interconnect fee to shoot up from 25c to R1.25, instantly making South Africa one of the most expensive countries in the world for mobile calls. This strategy was so effective for MTN and Vodacom, that Cell C was never able to compete effectively. The robust efforts by the major operators to persuade the regulator not to cut the fees gave an indication of how strongly it contributed to their cash flow and, ultimately, profits. However, the consumer was the big loser, and the situation was untenable. Call costs have plunged since the enforced reduction of interconnect fees. It (reducing interconnection fees) is no mere useful exercise; it is fundamental to making communications more affordable."