Cell C and Telkom have responded to the statement made by Roy Kruger, technical advisor to the Minister of Communications, criticising the private sector for the state of South Africa’s broadband.
Kruger said that the private sector has had 18 years to deliver broadband to rural South Africa and yet they’ve “done nothing” in those areas.
Among the counter-points made by Telkom was that the private sector has made significant investments in rural areas:
- Telkom has a number of rural exchanges.
- Since launching 2G in 1994, mobile operators have been able to reach 99% of the population.
- Private sector has rapidly grown 3G coverage from only 25% of the population in 2008 to 80% in 2012 (based on Vodacom’s annual reports).
Vodacom and MTN were also asked for their feedback, but did not respond by the time of publication. However Cell C and Telkom both offered lengthy responses.
For the sake of accuracy, and because they are quite interesting to read in their entirety, they are included unedited below.
Each operator was asked four questions about government’s broadband plans, which Cell C boss Alan Knott-Craig responded to as a whole:
Affordable broadband for all has become a national imperative. To achieve this goal, we need an extensive coverage footprint that can deliver broadband services to all South Africans at high speeds and affordable prices. The key challenges faced by operators in achieving these goals are capital expenditure and spectrum.
Capital expenditure determines network rollout (coverage footprint) and price, whilst spectrum determines speed and price. The more spectrum an operator has, the lower the price and higher the speed. Less capital expenditure ensures an operator is able to offer services at lower prices.
A national wholesale broadband network would address these challenges, as spectrum would be allocated to a single entity made up of operators and entities (including state-owned companies) that have the means and willingness to participate in this initiative. Capital expenditure per company would also be significantly less.
Government, through the regulator, would stipulate the footprint of the network and determine the wholesale price. Industry players would then compete at a retail level on price (retail) and service to the benefit of consumers.
To ensure rural areas are prioritised, Government could also stipulate the sequence of the network rollout to ensure coverage is provided to rural areas first. This will speed up the entire network rollout as companies would want to reach the metro areas, where the revenues are, as soon as possible.
This has been done in other countries with great success.
Alan Knott-Craig
Telkom opted to answer each question individually:
1. Can government trust the private sector to meet or exceed their rural developmental goals?
South Africa has ambitious goals of universal broadband coverage by 2020. The private sector, on its own will cover the majority of the population (at least 80%), but it will not fully achieve this goal.
The private sector has made significant investment in rural areas. Telkom has a number of rural exchanges and a total fibre of 143,000 kilometers, spanning backbone, distribution, backhaul and access. Since launching 2G in 1994, mobile operators have been able to reach 99% of the population. In addition, the private sector has rapidly grown 3G coverage from only 25% of the population in 2008 to 80% in 2012 (based on Vodacom’s annual reports).
While it may be possible to extend mobile networks beyond 80% population coverage using various government incentives: economically, mobile is not the best choice of technology beyond a certain limit.
To achieve 100% (universal broadband) in any country e.g. Australia, entails the use of satellite for the upper percentiles. In this regard on 20 July 2012 Telkom launched our low cost Space Stream Home at R499 per month – available anywhere in the country. This product will be vital in rural settlements where geographic isolation from backhaul nodes or hilly terrain make the building of a mobile network very costly. This technology is also effective in the radio black-out zone in the Northern Cape. However, Telkom still sees an opportunity to work with government to subsidise, as an example, the installation and end-user device fees in order to increase the affordability of the product.
2. If so, how can a private sector driven broadband roll-out to rural South Africa be made to work?
There are a number of regulatory levers and government initiatives which can be employed such as subsidised rural infrastructure, regulatory holidays, coverage obligations etc..
This year, the Brazilian Government awarded regional lots of low frequency spectrum to four incumbent mobile providers. This low frequency spectrum will enable operators to build out networks less expensively than with high frequency spectrum.
In Brazil, spectrum was auctioned in order to raise money for the government, but there is also the option of allocating spectrum for free to experienced operators that can work with government to achieve universal coverage objectives. This has been done in Japan, Malaysia and South Korea.
If government were to address the demand side e.g. digital literacy, access to content, websites in indigenous languages and e-government to enhance the value of broadband to end users, it would increase user willingness to pay for commercial broadband access and thereby expand the “market frontier”.
3. How can broadband in rural areas be made cheap enough for people to use it?
Government can reduce the price of broadband in rural areas by lowering the cost of setting up and operating networks through subsidies (to end users and/or operators), tax incentives for operators, reduction of import duties on end user devices and network equipment, waiving of municipal fees for site rentals and rights of way, provisioning of cheap/ free electricity for rural networks or providing an open access rural network [no country has created an open access mobile rural network as yet]. The other leg of expanding broadband usage is providing users with access to devices. In Brazil, for example, the government rolled out more than 8,000 tele-centres that provide free access to 98% of municipalities. In addition they donated computers to the public and civil society organisations.
4. Will a government driven national broadband network such as Australia’s, using companies like Telkom, and state-owned entities like Sentech and Broadband Infraco for the necessary infrastructure and wholesale services, work? If so under what circumstances, if not, why not?
The Australian model involves building out a National Broadband Network (NBN) using a new government-owned entity (NBNCo) created specifically for this purpose.
However, the Australian model is not ideal for South Africa for two reasons.
Firstly, by creating a brand new company the Australian government chose to forego the experience and the network assets that had been accumulated by the incumbent Telstra. Secondly, in order to make the network viable, the government will spend AUS$11 Bn (R99 Bn) to compensate Telstra for switching off its network and migrating traffic to the government network. This is almost a third of the total cost of AUS$43 Bn (R387 Bn). The process of creating a new entity and negotiating Telstra’s traffic took over 5 years.
There are alternative models to creating a successful national network by leveraging the assets of Telkom and SOEs. For example, the Malaysian government is a passive investor, which provides subsidies to the incumbent operator, Telkom Malaysia, to roll out and manage the network. This negotiation process took less than two years. The government is investing US$773M (R6.9 Bn) of the US$3.6 Bn (R32.4 Bn) rollout cost, with Telkom Malaysia covering the balance. The fibre network has passed over a million homes and boasts 400,000 subscribers.
In Singapore, the government used an open bidding process to find private companies to build and operate the national broadband network. SingTel, the fixed line incumbent, led a consortium that won the mandate of designing, building and operating passive network infrastructure such as fibre and ducts. The number two operator, StarHub led a consortium that won the mandate for designing, building and operating active components of the network such as switches and transmission electronics. The government provided grants of up to $800M (R7.2 Bn) to these companies to cover construction costs and lease infrastructure that they had already built. However, viability of these networks is under question as operators have not had to migrate traffic to the new network as yet.
There are common threads in these examples. Firstly, there is a single network that limits duplication. Duplication can waste state resources and reduce the economic viability of individual networks. Secondly, the government has made an investment in the network to stimulate rollout that would not be viable for private sector entities to fund.
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