Southern Africa: MTN's fate in the balanc.

A proposed merger between Bharti Airtel and South Africa's MTN collapsed in May, apparently because of the Indian firm's view that it would be taking over the latter. This was followed by an approach to MTN by another Indian firm, Reliance Communications, with a view to a full merger.

The fate of MTN is important to Africa as a whole because the South African company operates in 16 African markets, from Botswana to Liberia and Uganda to Ghana. However, the two companies have very different market portfolios: Reliance has 50m subscribers in one country, while MTN has 68m customers in 21 countries in Africa and the Middle East and Asia. A spokesperson for MTN said that "certain legal and regulatory issues" had stalled talks on the merger but the real reason for the lack of progress seems to be an internal Indian dispute. The main owner of Reliance, Anil Ambani, is facing legal action from his brother, Mukesh Ambani, who claims that he has first right of refusal on any shares in Reliance Communications.

"The Indian firm and MTN are therefore now believed to be examining whether a legal solution can be found. If a unified Indo-South African company were created, it would be one of the world's 10 biggest telecoms operators.

Despite MTN's success, the Organisation for Economic Cooperation and Development's (OECD) latest African Economic Outlook highlighted a number of problems in the South African telecoms market. It stated: "Liberalisation of telecommunications in particular has been long delayed. Telkom, in which government holds a 39% direct stake and a further 17% through the Public Investment Corporation, still has a monopoly of fixed telecommunications, while just two operators exist with their own networks. Consequently, the telecommunication costs are extremely high, preventing the development of potentially dynamic service activities, such as call centres."

However, it continued: "The 2005 Electronic Communications Act establishes a new regulatory and policy environment that will result in a radical liberalisation of the telecoms sector in the next few years. The prospective opening is already leading to incipient competition for Telkom, which has lost several big contracts in recent months and is experienced declining profits."

Competition in the landline sector should ensure that prices continue to fall and that the current long waiting lists to install new lines are reduced. Of the 2.8m landlines installed by Telkom between 2002 and 2007, 70% were disconnected because of payment problems but whether this figure will fall once competition reduces prices remains to be seen.

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The OECD report also criticises the ADSL broadband market because of the "slow and cumbersome" licensing process. It continues: "The dominance of a few well established players in the sector manifested itself in high prices and monopoly rents. South African telecoms tariffs have been very high by international standards for many years, and progress in bringing them down has been slow. ADSL broadband tariffs are particularly high by international standards, reflecting Telkom's dominant position in this segment." It is clear that further deregulation in the sector is required.