The way has been cleared for South Africa's biggest privatisation to date - the $1bn sell -off of the country's mainly state-owned telephone operator Telkom.

Recently Telkom and the industry regulator ICASA (Independent Communications Authority of South Africa) have been arguing over Telkom's increased charges to its customers.

They have now reached an agreement, thereby clearing an obstacle to the government's move.

ICASA had wanted price rises limited to the rate of inflation, which is less than 1.5%.

Prices pegged

It said the rises were too steep and hampered the country's attempts to spread phone access to the poor.

Telekom has agreed that its price rises of 5.5% will be the last increase this year.

It will also limit increases over the next two years - in effect foregoing income of around $32m.

Mandla Langa, ICASA chairman, told the BBC's World Business Report that Telkom had agreed to lower the tariff for residential users.

Furthermore, the company will not cut off customers who could not afford the higher tariff.

"People are able to make emergency calls and they are also able to receive calls," he said.

The settlement also removes uncertainty for potential investors.

Had the deal not been reached, Telkom may have had to carry a contingent liability on its books ahead of the sale.

Trouble brewing

The country's biggest labour federation COSATU, a key ally of the ruling African National Congress, is to decide whether to strike over the state's plans.

Privatisation is a key pillar of the President Thabo Mbeki's economic policy.

"In a country such as ours with massive infrastructure and service backlogs and extreme inequalities, competition in a basic needs sector such as telecommunications is inappropriate," COSATU General Secretary Zwelinzima Vavi said.

"It is likely to result in cherry picking of profitable market segments and to the neglect of the majority," he added.

The government expects to license the new operator by the end of the year.

A competitor to Telkom is also due to be licensed later this year.

It is likely to target the lucrative corporate market, leaving most residential users in the hands of Telkom.