POTRAZ adopts CPI-linked costing structure

By Staff reporter | 09 Aug 2019 at 20:50hrs
Telecommunications regulating body POTRAZ yesterday abandoned the Long Run Incremental Cost (LRIC) tariff model in favour of a CPI-linked costing structure, which will result in a regular adjustment of the tariff.
The Long Run Incremental Cost (LRIC) method which was set in 2014, and which culminated in a decrease in mobile data charges in 2018 assumes a Bottom-Up price determination format that factors in technical considerations such as network infrastructure capabilities and efficiencies.

But now POTRAZ has abandoned the model in light of the prevailing economic environment, which is characterised by high inflation, low aggregate demand, forex shortages and long power blackouts. The new tariff adjustments announced by the regulator and shown in the table below come as the country's key mobile network operator has scaled back its operating scale by reducing generator run times for its mobile base stations, with sustainability issues cited as the cause. The effect for customers has been tangible, with noticeable declines in service quality and occasional service blackouts.

Prior to the new pricing guidance, network operators had last been cleared to adjust the tariff thresholds in April 2019 shortly following the introduction of the interbank exchange rate. At that time tariffs were realigned with the prevailing exchange rate.
 Moving to the present, the exchange rate has since depreciated by a further 224% from ZWL$3.0251 at the start of April to ZWL$9.79955 today. The result has been escalating operating costs for network operators worsened by the increased use of diesel power arising from the ongoing electricity shortage.

Last month, a desktop analysis on the effect of the power shortages and the switch to diesel generator estimated the cost to the mobile network industry at ZWL$1.27 billion. This analysis was done when diesel was still at ZWL$7.01 at a run time of 18 hours a day using the last reported number of active mobile base stations from the POTRAZ quarterly reports. To cover the additional cost, mobile network operators would have to raise an additional ZWL$104.54 from the active subscriber base. With the diesel cost now at ZWL$9.09, the updated figure is an additional ZWL$135.56 from active subscribers.

The most recent POTRAZ report quoted the average annual revenue per mobile network subscriber at ZWL$89.53. This means mobile network providers need to raise their prices by 151% on average in order to cover the cost of sustaining full-scale operations.
According to the publication from POTRAZ, the proposed tariff changes are increments of 113% across the board for all network services. Evidently, the proposed increases fall significantly short of the exchange rate movement in the same period. They also fall short of the desktop analysis estimation of an average 151% price rise needed in the current conditions for mobile network operators to sustain full-scale operations. Admittedly, the shortfall could feasibly be offset by an improvement in the power supply, although the electricity tariff has also been increased by 355%. At the moment the prospect seems unlikely, with the government prioritizing productive sectors for the incoming 400MW of imported electricity.
Well-placed sources told this publication that there some operators who were pushing for a 300% tariff increase and immediately wrote back to the regulator against the approved adjustments. But its more likely that with the new tariff determination model, there will be gradual and regular price increases.

Ultimately, given that the exchange rate is expected to continue depreciating and diesel costs will keep rising as a result, outside of a sustained improvement in electricity supply the industry will inevitably be calling for another upward review of tariffs sooner or later. Alternatively, the mobile operators will just scale down operations to contain costs at the expense of service quality, as is already the case with Econet. Considering the growing importance of network services particularly the internet, not just in civilian life but in other critical areas, the impact of declining network services could be quite significant. In the end, POTRAZ, for now, has a tough balancing act between protecting vulnerable consumers versus adding another complication to the economic recovery efforts.



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