Prices are the essence of the market. They represent a two-way communication between those who make things and those who demand them. Prices are the essence of the market. They represent a two-way communication between those who make things and those who demand them.

Prices are not determined by costs alone but by how important things are valued in the market place relative to alternative uses. When we mess with prices we mess with market communication. We start to misallocate. We end up with goods we don`t need and less of those we want more of.

It is ironic then that a law proclaiming to foster communication should attempt the destruction of the mechanism best able to encourage it.

That is what the new Convergence Bill does when it lays down the law regarding rules of price setting among private communication networks. This Bill is wrong on three key principles: price manipulation, ownership of assets, and ability to freely contract.

Consequently, while proclaiming to foster investment in communication, this Bill will stifle it.

Pricing issue

Firstly, prices. It`s easy to mess with prices and politically popular; it`s much harder to understand how important they are to the whole process.

In one clause the Bill says the "Authority" may prescribe rates and that these "rates must be related to costs" and "reasonable rates of return".

But entrepreneurs do not seek reasonable rates of return. They seek abnormal rates of return. If a highly in demand service has prices capped at rates promising only normal returns, then a private investor would do better to apply his funds elsewhere. Capped prices send a signal to ignore markets with "reasonable returns" and focus on those that promise "unreasonable" ones. After all, if you wanted normal returns, you`d deposit the money in a bank!

Asset ownership question

Secondly, ownership of assets. Clause 37 says there is an obligation on network providers to interconnect.

But we are talking about private assets. This is the equivalent of saying car-owners should be forced to let any holder of a licence drive their vehicle. Again, the government motivation is to ensure connectivity of networks but the outcome will be reduced investment.

Why? Because no one will spend money on high quality networks if the can simply acquire a licence and hook up to yours at government rates.

Freedom to contract

Thirdly, freedom to contract. The constitution says freedom of association is a citizen`s right and one would hope this extends to companies as juristic persons. In practice however, we allow the state to determine how companies interact or disengage with each other and even let the terms of their engagement be prescribed.

The Convergence Bill continues this theme. Section 42 states that holders of a network service licence can insist another holder of network infrastructure lease assets at rates set by .

If they don`t, then the "Authority" may prescribe terms and conditions to which parties must agree within a set time-frame.

`s response to ICASA`s declaration of SAT3 as an "essential service" should be an example and warning that managers in charge of private assets are not obliged to invest in infrastructure and then share.

Looking back

The Telecommunications Act of 1996 was implemented after apartheid. It is a child of the .

In that time we have had ten years of consumer abuse. The new Convergence Bill again appoints an official authority as guardian of prices instead of encouraging markets. Our consequent experience over those ten years was inflation-based price increases with poor service. In contrast, those countries that trusted in private ownership saw rapid levels of investment leading to price decreases of between 10% and 20% every year. Shouldn`t we therefore be sceptical of a Bill promoting another executive agency as our nanny, instead of deferring to the wallets in our pockets?

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