Telkom South Africa, South Africa's incumbent telco, operates
in a unique set of conditions. The legacy of apartheid means
that there is a big teledensity disparity between white
residential areas and more impoverished areas in the country.
In the white neighbourhoods, 97% of people have access to
telecoms services whereas in the under-serviced areas, that
figure is barely over 50%.
One of the main challenges for Telkom remains the installation
of new lines in under-serviced areas. The operator has been
given certain licence obligations by the government and plans
to have seven million lines operating by the year 2002. The
operator will lose its fixed-line monopoly in 2003. The
exclusivity period has enabled Telkom to embark on an expensive
modernization programme ahead of full-scale competition.
The company benefits from having SBC Communications and
Telekom Malaysia as strategic partners. The government sold a
30% stake in May 1997 to the two operators for $710 million.
These two operators have been playing an active role in
Telkom's modernization process.
One of the key goals of the modernization programme is to
improve efficiency levels. The operator announced in July that
its annual operating costs rose by 22.1%. The company is
implementing a voluntary retirement programme as part of the
efficiency drive. By the end of May 1999 the company had
received 2,500 applications for voluntary retirement. Over
2,100 of the applications were approved and 200 were rejected
owing to the need to retain certain critical skills.
The operator is determined to be the number one provider of
high-bandwidth services to corporate customers. Telkom has
rolled out ATM (Asynchronous Transfer Mode) services in all the
major metropolitan areas of the country.
In an exclusive interview with Global Telecoms Business, the
CEO of Telkom South Africa Sizwe Nxasana talks about the
different challenges facing the operator over the next
two-three years and explains how it aims to provide the
necessary quality of services to all different sectors and
areas of the country.
When we spoke to Dikgang Moseneke, acting CEO of
Telkom South Africa in December 1997, he spoke about the
teledensity disparity between white residential areas and other
more impoverished areas. How are you bringing telecoms services
to more impoverished areas? How big is this imbalance?
Nxasana: Obviously there is still a large imbalance.
Our research shows that coverage levels are in the region of
97% in the serviced areas, but only about 53% of people in
under-serviced areas have access to a telephone. We are
redressing this by installing more than 1.7 million lines of
our 2.8 million-line initiative in these under-serviced areas.
How many new lines are you installing in 1999? What
are your projected targets for improving teledensity? Are you
scheduled to meet government targets to install almost 3
million new lines?
Nxasana: We are already about 100,000 lines ahead of
the licence target at this stage. So we don't foresee any
problems in meeting the five-year target. We will install
600,000 lines in 1999, bringing the total number of installed
lines in the first three years to about 1.5 million. Depending
on population growth, we expect that 7 million lines will be in
operation in the country by 2002, providing us with an
estimated teledensity of about 16% - as opposed to the current
What role do you think that Telkom South Africa could
play in the revival of the South African economy? How much
annually do you spend on network modernization? How is the
weakness of the Rand affecting your operations?
Nxasana: We spent just over R11 billion ($1.8
billion) in capital expenditure in the past financial year,
compared to about R9.8 billion in the previous year
(1997-1998). That is a significant investment, especially in
the context of direct investment in South Africa's
infrastructure and the country's economy. Without the
investments by Telkom, particularly in infrastructure, the
country would have recorded negative GDP growth over the past
two quarters. Our expenditure levels ensured positive GDP
growth in South Africa.
We are spending a significant amount on modernization. We are
deploying ATM technology, have almost completed the
construction of our national network operating centre and are
currently rolling out SDH across the whole country.
The weakness of the Rand obviously has an impact on our
operations, as we import a lot of equipment. The high interest
rates over the past year have also had an impact, but we have
been working hard to maximize the returns that we are obtaining
on any specific investment decisions that we make. By and large
we have managed to get through relatively unscathed by
tightening up our procurement process and making sure that we
really question our investment decisions in any piece of the
infrastructure that we invest in.
Telkom South Africa is scheduled to lose its monopoly
in 2003. How are you transforming the company into a
market-oriented entity? Do you agree with the government's
plans to combine Transnet and Eskom into a second national
operator? Do you believe that there should be more than two
Nxasana: We are taking a number of steps to become
more market-focused, including extensive training to upgrade
our people's skills. This has already had an impact on
efficiency levels and therefore competitiveness. We are
installing new systems and processes, which will improve our
ability to identify and roll out new products in the market. We
are launching a whole range of new products that will cater for
various needs and segments of the market. To improve our
response times, we are making sure that we are well prepared in
terms of the quality of service that we offer to our customers.
So a number of things are currently on the go and are all
happening simultaneously within the company as part of our
preparation for competition.
I don't believe that it really matters whether we agree or not
with the government's plans to combine Transnet and Eskom. What
we require is certainty, irrespective of the number of
operators, that there will be a secure regulatory environment
and a stable licensing regime. We can then adapt our operations
to the regulatory framework that we are operating under.
How has the current lack of competition in the
domestic market affected your pricing strategy? Do you believe
that there will only be widespread price cuts once there is
increased competition in the market?
Nxasana: Well there is already competition in the
form of the mobile industry, and the network service area is
also open. We have exclusivity on the PSTN - the private
switched network and services - but the South African market
has benefited a great deal from the decision to ensure Telkom's
exclusivity status, in the sense that we have invested a lot of
money in infrastructure. We have covered a lot more ground than
would have been possible without this exclusivity.
If you look at the obligations that we are meeting in terms of
modernization and improvement to customer service levels, this
has all clearly benefited the South African population. Pricing
developments will be determined by the number of operators that
enter the market, as well as several other factors, but based
on international experience, we expect to see downward pricing
Telkom will continue its rebalancing drive to bring call
charges into line with international norms. While many
world-class companies have a price ratio of 1:4.5 between local
and long-distance call charges, Telkom's ratio has been far
wider. Rebalancing in 1997 and 1998 led to the ratio narrowing
to 1:13 and 1:9.2 respectively, and the 1999 adjustment has
resulted in a ratio of 1:7.8.
How has Telkom South Africa benefited from Telekom
Malaysia and SBC as strategic partners? Have SBC and Telekom
Malaysia played a key role in the development of Internet and
Nxasana: Telkom has benefited a great deal from a
number of perspectives. We have just over 75 managers from SBC
and Telekom Malaysia in South Africa, who are adding a lot of
value in terms of the transfer of skills, management and new
ideas. Thanks largely to them, we offer a whole range of new
products and services in the value-added services area. We are
involved in the Internet through our subsidiary, Intekom, and
also through the infrastructure we provide through SAIX (South
African Internet eXchange). Both SBC and Telekom Malaysia have
been involved in these developments.
Dresdner Bank and Sumitomo Bank have recently been
mandated to arrange a $100 million credit facility for Telkom
South Africa. What is the significance of this arrangement for
Telkom? Has your debt burden been increased by the need for
capital expenditure outlays?
Nxasana: We are obviously spending a lot of money on
our capital expenditure programme. Our arrangement with
Dresdner and Sumitomo is part of our fund-raising initiative.
This facility will be significant when we address our funding
requirements. We financed part of the capex programme through
our own internally generated revenues and the rest through
borrowings. As we are importing a lot of equipment, we will
look to foreign loans to make sure that we don't put pressure
on our local reserves. That is why we have to look at a
combination of local and foreign borrowing.
Our capital expenditure programme and funding requirements
would normally put pressure on our debt burden, but in fact our
debt-equity ratios are being managed very carefully. Rather, it
is a question of looking at our licence obligations and making
sure that we are obtaining the corresponding benefits. Both the
government and the regulator play a role in making sure that we
can work in the environment that was anticipated when the
exclusive licence was issued. So it is a question of
continuously watching and managing the processes as we go
Could you tell us about the situation which led 10,000
of your 59,000 workforce to go on strike? How did this strike
affect your operations? Is a settlement with the Communications
Workers Union and the Alliance of Telkom Unions close?
Nxasana: We have reached agreement with both union
bodies on their demands after fairly lengthy negotiations and
processes, and our workforce is back at work. Of course the
strike had an impact on operations, but we had put contingency
plans in place, particularly when CWU was on strike. Although
our line roll-out targets were affected for the six days they
were on strike, I think that we managed really well in terms of
addressing service and service delivery targets, resolving
faults and addressing customer queries.
Could you tell us about the recent agreement with
Telcordia and Hewlett-Packard? Why did you decide on
Telcordia's MediaVantage OSS system? What other suppliers have
you been working with?
Nxasana: It is all part of improving the level and
quality of Telkom's service and efficiency levels. Our billing
systems and IT systems play an integral role in improving and
delivering customer service. We looked at a number of companies
that had submitted bids to improve our billing processes and
customer interface system. Telcordia and HP had the most to
offer in quality of service, life cycle costs, interoperability
with other systems and especially in terms of expertise in this
The system will form part of our total package of improving
our delivery process, as well as the reliability and quality of
the information on which we base decisions in the delivery
chain. Our decision was based on very strict criteria which
have been applied meticulously and stringently to all bidders.
Our main suppliers are Alcatel and Lucent. We also deal with
Siemens a lot. From an IT standpoint, we deal with all the
major suppliers in the country - Hewlett-Packard, Compaq, Dell
How do you view DSL technology? Which technologies are
you trialling? Do you plan to issue a tender for a new billing
system? Could you tell us about the ATM network that you are
Nxasana: Our view on DSL technology is that we have a
significant copper embedded base in the country, and as part of
our attempts to improve the capacity and speed of the network,
DSL technology, whether ADSL or DSL, would offer us the
opportunity to increase this. We are looking at the various
forms of DSL technology for various customer needs and are
trialling a few of them at the moment, but we haven't made a
decision yet on which part of the DSL technology to deploy.
We started deploying ATM quite extensively across the country
at the beginning of the year, and are at a point where we have
covered practically all the metropolitan areas in terms of ATM
availability. Obviously this offers bandwidth on demand,
particularly to corporate customers, enabling them to manage
the build-out of their bandwidth requirements more effectively
and efficiently. We are at the stage where quite a few
customers are now being put on ATM, and that process will
continue as part of our sales, marketing and customer service
initiatives. It significantly improves the flexibility with
which we are able to provide certain services.
The tender for our billing system was actually issued last
year, and we are further down the line in terms of implementing
a new billing system. The tender was awarded to a combination
of PQ Africa and Amdocs. We hope to have a major portion of our
flexible billing system and billing engine in place within the
next month. We already have certain components of the billing
system in place and functioning, such as per-second billing
which we launched at the beginning of the year.
How have you been using the $710 million that the
government handed Telkom as proceeds from the sale of 30% of
Telkom to SBC and Telkom Malaysia? How have you been
modernizing the telecoms infrastructure in South Africa since
then? What do you believe to be your major accomplishments in
Nxasana: The figure you mention - which amounted to
about R4.4 billion ($728 million) - has mainly been used to
fund the line roll-out programme, to access new technologies as
part of our modernization process and to train our people. We
have allocated R2.3 billion over five years for training and
human resources development.
We have been very successful with our expansion and
modernization programme, as evidenced by our success in
achieving our licence targets. Another big success story has
been our training and human resources development, where we
started in 1997 with some 22,000 functionally illiterate
people. This figure is now down to 15,000: in other words, we
have taken a significant number of people who were functionally
illiterate to a situation where we are able to train them to
become technicians and operational specialists. By and large I
think that the investment has been very well spent in terms of
the original objectives.
How do you view the potential for IP telephony? Do you
believe the demand for services such as E-commerce will
escalate over the next two-three years?
Nxasana: We have done our own projections on the
impact of IP telephony on our business, and have no doubt that
IP telephony will have an impact on users of the Internet or
other devices that will enable them to communicate over IP.
When the time is appropriate, we will be able to offer
customers services in IP telephony ourselves.
I think that E-commerce will escalate dramatically,
particularly in terms of business-to-business transactions. We
are taking a number of steps to address E-commerce developments
in terms of new products. We launched CYBERtrade earlier this
year, which is already meeting the requirements of a whole
range of customers. We are considering creating an IP protocol
based on the ATM technology that we are deploying which will
provide bandwidth. Later we will have high capacity broadband
in the whole country to address and meet the demands of
corporates, SMEs and residential customers for Internet and
Do you believe that this could become the key area of
competition in the future due to the potential revenues that
can be derived from the business sector?
Nxasana: I think so. If one looks at developments
elsewhere, it is fairly clear that it will be one area of
potential competition as we move into the future. Obviously,
the development of the Internet and its use generally in South
Africa will be dependent on the level of education, coverage
and availability of PCs. We are looking at various initiatives
in that area in terms of the new products and services that we
will provide and how we will package these. At the end of the
day, although there will be competition, I think the difference
between the companies that succeed or fail will be based on the
packaging of products in terms of price, features and so on.
If we could look at cellular, how many subscribers
does Vodacom currently have? When do you expect to offer
customers enhanced wireless data services?
Nxasana: Vodacom has about 2.2 million subscribers.
The provision of wireless data services will obviously depend
on the development of third generation technology. If 3G
becomes available in 2001, Vodacom is already looking at
requirements for handsets, equipment needs, infrastructure and
spectrum. They are doing a whole range of things to be ready
for the advent of increased demand for data services in mobile.
Do you believe that there should be more than two
Nxasana: That is a moot point. Based on the size of
the market, there could conceivably be room for more than one
mobile operator, but I don't think there is room for more.
For Telkom, it is the regulatory environment in which these
new entrants will operate that is of prime importance. We would
like to see a regulatory environment that promotes competition
by levelling the playing field for all operators. We strongly
believe that there should not be differential treatment of
existing and new operators, nor should there be
cross-subsidization of inter-connection to assist new entrants.
How are you restructuring the company to make it more
efficient? Do you believe that Telkom has to implement a
wide-ranging employee reduction programme to have a healthy
future? Would this not meet stiff opposition from unions? How
are you overcoming this problem?
Nxasana: Staffing costs represent a significant part
of our operating costs - in the region of 47%. As we have to
increase efficiency levels and sustainable profits in the
future, we have to look at all aspects of the business and
improve efficiencies, cost-effectiveness and revenues. So a
part of the restructuring will have an impact on staff in terms
of benchmarks such as employee/line ratios and revenue/line
ratios. To that extent, the number of employees will have to
fall as part of our restructuring programme. We are committed
to a consultative process with our unions, to ensure that we
can effectively address the socio-economic impact of
In July 1999 Telkom announced year-end revenues of
$3.78 billion (R22.6 billion) while profits declined by 6%. Why
couldn't you deliver higher profits? Capital expenditure costs
are expected to rise by about 50% in 1999. How will you reduce
operating expenses to ease financial pressure?
Nxasana: There are many reasons for this. Firstly, we
have operated in a very tough economic environment over the
past financial year: interest rates were very high, and the
level of unemployment was increasing. Therefore the level of
affordability was very low in relative terms. This had an
impact on both our revenue streams and our expenses.
There are four main drivers of operating expenses within the
organization. Firstly, inter-connection. We have an environment
where we pay a considerable amount of money to the two mobile
operators when calls originate in our network and terminate on
the mobile network. Those costs are quite significant, and are
based on the inter-connection agreement that we have with both
MTN and Vodacom. The second part of our significant expenses
relates to staffing costs, which we have just discussed. We
need to reduce the staff cost contribution to operating
expenses, which is why we are going through a major
Thirdly, owing to the high interest rates, our finance costs
were quite significant last year. This also had an impact.
Finally, our investment in capital expenditure led to a very
high depreciation charge. This relates to the contribution to
our operating expenses.
If you consider all these things, they contributed to the kind
of profit declines that we noticed in the past financial year.
We have put a number of processes in place to address these
matters. We are also looking at other ways of improving
efficiencies and reducing costs.
Operating expenses increased by 24% to reach $3
billion. How do you intend to reduce this figure? How
successful have the voluntary retirement packages been?
Nxasana: Just over 2,000 voluntary early retirement
packages were granted. We are also spinning off non-core
operations such as our vehicle fleet, engineering and
electronics workshops and our non-core property portfolio. This
will contribute considerably to a future reduction in our
However, our operating expenses this year will again be quite
significant, as they include the costs of the further
restructuring required to improve future profitability. These
costs are fairly high - R1.3 billion ($215 million) - owing to
our efforts to minimize the socio-economic impact on the people
who will be affected. However, this investment is necessary to
create sustainable earnings going forward.
What role is Telkom South Africa playing in the
development of the SAT-3/WASC/SAFE system? How will the
build-out of this network benefit customers in South
Nxasana: We were the main promoters of the
SAT-3/WASC/SAFE submarine cable system. In June we signed the
construction and maintenance agreement, involving 40 operators
or countries, and are further down the line in awarding
contracts to companies that will build the cable. A 40 gigabit
system upgradable to 80 gigabits covering over 30,000km,
SAT-3/WASC/SAFE starts in Europe with a landing point in
Portugal, various landing points on the west coast of Africa,
two landing points in South Africa (Cape Town and just north of
Durban), Mauritius, India and finally Penang. That links us to
both Europe and the rest of the continent.
The system will provide direct links that have a positive
impact in reducing tariffs in the continent, and will equip the
continent to create a platform on which to build Internet
infrastructure and the data networks that are required owing to
the increase in data transmission. It will link us to Asia
through India and Penang in Malaysia, which are the main routes
in terms of the trading activities that we currently have. The
capacity that we will have on the submarine cable system should
see us through the next 25 years.
What are Telkom South Africa's regional aspirations?
Do you hope to become Africa's biggest telecoms hub? Do you
plan to make international investments once you lose your
Nxasana: We are already the biggest African operator.
We are determined to maintain and increase the lead we have
over other African operators. We are creating South Africa as a
telecoms hub as we speak. SAFE, the submarine cable system that
we are talking about, is part of that strategy. We have another
project in the pipeline: to deploy satellites and terrestrial
systems to increase our connectivity with the rest of the
continent. This will in turn provide opportunities for the rest
of the continent to transit through South Africa and therefore
promote the strategy of creating South Africa as a telecoms hub
on the continent. Right now we are exploring commercially
viable options that would add to our profitability, not only in
the long term but also in the short-to-medium term.
Do you hope to sell more shares before 2002? Do you
believe that the government would sanction such a sale? Would
you like the government to relinquish its golden share?
Nxasana: It is up to the shareholders to decide
whether to sell shares. Whether they plan to sell shares before
the end of the exclusivity period is really up to them to
decide. As management we have a responsibility to increase
shareholder value, and that is what we are doing. The
government plans to sell another 10% of Telkom shares to the
empowerment companies, unions and employees, but I can't say at
this stage whether they will opt for an IPO and sell more
How successful has Telkom South Africa been in
improving service to rural areas? Could you tell us about your
roll-out programmes in these regions? Have you been deploying
Nxasana: We have been very successful in rural areas.
This is borne out by our attainment of targets and retention of
customers in rural areas. We are deploying wireless local loop,
particularly in the under-serviced areas, which has been the
ideal vehicle to allow services into rural areas owing to the
cost, the speed of deployment and flexibility.
What are your hopes and ambitions for the company over
the next two-three years? What are the key challenges for
Telkom ahead of widespread competition in the telecoms
Nxasana: I hope that in two-three years we will have
substantially completed the restructuring progress, to
transform Telkom into a company that is the supplier of choice.
I hope that we will reach levels of efficiency comparable with
other operators in our peer group, particularly in Europe and
South America. The key challenges can be summed up as follows:
to meet our licence obligations, achieve that goal efficiently
and continue to increase our profits.