The government has turned its back on its own parastatal, choosing to award a R454million tender to Neotel instead of Telkom.
The contract, awarded to Neotel by the State Information Technology Agency, will see the second network operator providing government departments with a faster, more advanced New Generation Network for the next five years.
The new infrastructure replaces the old network which was built on Telkom's infrastructure and was launched in 2003. It has not been upgraded since then, despite yearly capacity requirements growing by 150percent each year.
The Neotel deal was concluded last May and migration in government departments was completed last month.
Llewellyn Jones, Sita's chief executive, said: "Users may not have seen a major difference with their screens, but they surely noticed a difference in speed.
"We will shortly be adding converged services which will include video and voice capabilities."
Telkom is losing its grip on the telecommunications market because of its inability to adapt to the fast changing competitive environment.
The Sita contract is the second major deal that Telkom has lost to Neotel.
Tenet, a non-profit organisation which runs the national research and education network, awarded a R192million two-year contract to Neotel and Internet Solutions for a third generation communications network for academic research.
Experts believe that consumers can expect lower landline telephone prices as competition causes the parastatal to rethink its monopoly position.
Telkom still has a monopoly in the asymmetric digital subscriber lines, a high speed digital Internet technology, but inefficiencies and limited coverage cause customers to seek alternative technologies.
Rudolph Muller, MyADSL director, said: "Telkom's business is coming under pressure, especially its margins. They'll have to drop their prices if they want to remain competitive.
Neotel's chief executive Ajay Pandey said the company would announce a consumer offering within 100 days.