South African phone utility Telkom said yesterday it expected South Africa to restrict its annual increases in tariffs to customers, amid government concerns about inflation.

"We expect tighter control," Gabriele Celli, Telkom's executive of regulatory and public policy, said in reply to an analyst's question at a presentation.

He said the industry regulator, the Independent Communications Authority of South Africa (Icasa), has not given any indication on what new tariff formula it may introduce, but the government and the central bank had suggested that they wanted smaller increases in so-called administered prices, which include phone tariffs.

Currently Icasa limits Telkom's annual tariff increases on a basket of services to consumer inflation less 1,5%.

The former monopoly phone operator also said it expects to lose 10% to 15% of its market share, after a planned rival becomes operational, probably later this year.

"We have budgeted for 10-15% market share losses in three to five years,"

Nombulelo Moholi, Telkom's group chief sales and marketing officer, said.

Although its statutory monopoly ended in May 2002, Telkom is still the only provider of fixed-line services after the industry regulator rejected a series of bids for a second licence last year.

However, in December, the government said it would award two groups, which originally bid for a majority stake in the proposed new operator, a 13% stake each.

Investors are anxiously awaiting the long-delayed launch of the new operator, expected around October, amid doubts about whether it will take off as scheduled.

Moholi said the biggest loss in business would likely be from the government as it would have an interest in the new rival through a 25% direct stake and indirectly via a 30% stake held jointly by the state transport and electricity utilities Transnet and Eskom.

"They may feel they have to allocate some of their market to the SNO (second national operator)," she said.

Moholi said the group would aggressively seek to grow its data business, particularly in small- and medium-sized businesses and hoped to double Internet subscribers by March 2007.

"We are also pursuing a defensive strategy to hold on to what we have," she added. Business customers, including the government, accounted for about 71% of fixed-line revenue in Telkom's 2003 financial year.

South Africa has been trying to establish a second national operator to compete with Telkom for more than two years, a move consumers hope will bring down the cost of telecoms services.

Telkom also revealed that it expected the South African government to hold on to its stake of around 37% in the operator, until at least March 2005.

"Our understanding is that government is locked in to March 2005," Telkom chief operating officer Shawn Mckenzie said.

He was repeating Telkom's position on the shareholding of the government, which listed part of the group in March 2003.

But there has been some confusion in the market recently about whether or not the government would try to reduce its stake before then.

Meanwhile, the group said it expected its annual earnings to be more than 30% above those of the previous year.

"Telkom...advises that it expects earnings and headline earnings for the financial year ending March 31, 2004, to be substantially above (those for the year to end-March 2003)," it said in a statement ahead of a presentation to analysts.

In terms of JSE Securities Exchange rules ‘substantially’ means a movement of more than 30%.

2004/03/24