Another instance where privatization trumped liberalization: The politics of telecommunications reform in South Africa—A ten-year retrospective
Robert B. Horwitz and Willie Currie
Department of Communication, University of California-San Diego, USA
Association for Progressive Communications, 6035 Broadway #8A, New York, USA
Copyright © 2007 Elsevier Ltd All rights reserved.
Available online 5 July 2007.
Abstract
Soon after the first democratic election in 1994, South Africa passed legislation to revamp the telecommunications sector—to roll out telephone service to the previously disadvantaged and establish an independent regulator to oversee the reform. The Government sold a 30 percent stake in the state-owned incumbent network operator, Telkom, to expand telephone service to under-serviced areas and populations. Ten years on, the reform has largely failed. Telkom, granted a 5-year period of exclusivity to expand the network, has used its monopoly power to thwart competition. It has raised prices so high as to be damaging to the economy. The Regulator has been largely sabotaged by the Government, in part due to the consequences of the haste to privatize, in part because the ANC leadership has been loath to trust democratic structures outside of its immediate control. The situation has opened up opportunities for rent-seeking under the ideological aegis of Black Economic Empowerment. The paper examines the relative failure of reform in South Africa in the context of internal South African politics and against a backdrop of sectoral reform in similarly situated countries.
Keywords: South Africa; Telecommunications; Privatization; Liberalization; Regulation; African National Congress; Black Economic Empowerment
Article Outline
1. Introduction
2. From White Paper to legislation: how privatization subverted liberalization
3. Telkom's exclusivity: shield and weapon
4. The distrust of independent government institutions: joint jurisdiction, weak regulator
5. Privatization in societies in transition: “rent-seeking” and Black Economic Empowerment
6. Toward a conclusion
References
1. Introduction
The first democratic, all-race election brought to power the African National Congress in 1994 and with it a mandate to transform nearly all South African institutions from their apartheid pedigree and point of reference. A process to reform telecommunications ensued soon after the electorate voted in the ANC as the dominant partner in a Government of National Unity. Following an unusual participatory, consultative policy process, Parliament passed comprehensive legislation in 1996 to revamp the sector, roll out telephone service to the previously disadvantaged, and establish an independent regulator to oversee the reform. Government thereupon sold a 30 percent equity stake in the state-owned telecommunications incumbent network operator, Telkom, to help facilitate the expansion of telephone service to under-serviced areas and populations (Republic of South Africa, 1996a).1
Ten years have now passed since the passage of the Telecommunications Act. By most accounts, the reform of South African telecommunications has been at best a bare success and at worst a medium-term failure. The Act granted Telkom a 5-year period of exclusivity to expand the network and prepare itself for eventual competition. Telkom, essentially managed by its equity partner Thintana Communications (itself a partnership between the American telecommunications giant SBC Communications (now, after merger, renamed AT&T) with a 60 percent stake and Telekom Malaysia with 40 percent), satisfied the letter of its rollout obligation to build 2.81 million new lines, but not the spirit of its universal service mandate. Telkom's high prices for installation, rental, and calls (and sociologically inappropriate billing mechanisms in rural areas) resulted in the disconnection of the vast majority of the new lines.2 Thus, whereas access to telephone service in South Africa has improved considerably since 1996, gains in connectivity have been accomplished almost entirely due to the market-led growth of pre-paid mobile telephony rather than by the legislatively mandated rollout of the fixed line network of the incumbent operator. Despite massive investment and construction, in the 10 years from 1996 to 2006 the final reckoning of the number of fixed line subscribers increased from 3.919 million to just 4.708 million. In a population estimated at between 44 and 47 million, this represents a current penetration rate of just 10 percent (and falling). In the same time period, mobile subscribers increased from under a million to over 19 million (Telkom (1997a) and Telkom (1997b); ITU, 2005; US Securities and Exchange Commission, 2006, p. 9, 15).3 Yet, notwithstanding the impressive growth of mobile, prices for telecommunications services in South Africa—including mobile—are strikingly high by international comparisons to countries with roughly similar characteristics.4 Thus mobile telephony—not Telkom—did increase access to communications, but high prices constrained use. The growth and flexibility of value-added network services (VANS), including Internet access, have been constrained not just by high prices for leased lines, but by a highly litigious and sometimes predatory Telkom. This is not simply a sectoral problem. Because telecommunications are an input into virtually all productive activities, high tariffs and constrained service offerings are now recognized as a tax on industry and a drag on economic growth.5
The Regulator, initially known as the South African Telecommunications Regulatory Authority (SATRA), then the Independent Communications Authority of South Africa (ICASA) when SATRA and the Independent Broadcast Authority merged in 2002, has not been particularly effective. Its authority has been limited through a cumbersome dual jurisdictional structure with the Ministry of Communications. And the Government's mistrust of the Regulator's independence has resulted in efforts to control it. The Ministry itself had a structural conflict of interest as both the policy-maker for the sector and the custodian of the state's considerable shareholding in Telkom. As a result, policy in the sector has unfolded in fits and starts, marked by many controversial incidents and abrupt reversals of strategy, the cancellation of ICASA regulations by the Minister, and the delay of competitive entry notably in the licensing of a third mobile and a second network operator (SNO).6
In short, South African telecommunications has been a sector plagued by poor policy and monopolistic behavior. This article explores the South African telecommunications sector 10 years after its reform legislation and tries to account for the relative failure of that reform. As always in policy and regulatory matters, the story is dense and complicated, but can be distilled into three interrelated themes:
1. Privatization—the selling of a state infrastructure asset to a private party—won out over liberalization—opening the sector to entry and fostering conditions for competition. This is best seen in three incidents:
a. The initial 1996 legislation, which eliminated the liberalization timetable worked out in the preceding White Paper policy process in favor of ministerial discretion, largely in order to satisfy the demands of Telkom's strategic equity partner (SEP), Thintana Communications.
b. Telkom's ongoing utilization of its monopoly over the backbone network and invocation of its legal exclusivity in order to inhibit the growth of competitive VANS and Internet service provider (ISP) services, and the relative inability of the Regulator to combat either Telkom's predatory designs over upstream and downstream competitive offerings or deal successfully with the company's litigiousness.
c. A regulatory struggle over Telkom's tariffs in which ICASA was compelled to approve high increases in local service in order to protect the value of the company's 2003 Initial Public Offering.
In sum, the Government partially privatized the incumbent network operator and by contract and policy protected it from competitive challenge.
2. Government distrust of “State Institutions Supporting Constitutional Democracy” as provided for in Chapter 9 of the South African Constitution, including institutions with various degrees of independence from government, such as the Auditor-General, the South African Human Rights Commission, and ICASA. The ANC-led government has been leery about permitting real independence for these “Chapter 9” institutions, and, at least in the case of ICASA, has not given it adequate operating resources. The Regulator suffered not only from having to do many difficult tasks quickly without adequate human skills capacity, but was in effect not permitted to develop and exercise those capacities because its authority and budget were so often undercut by the Ministry and its Department of Communications. That environment, in which a duly constituted democratic body was largely foiled in its efforts to do its job, dovetailed with the larger political environment of ANC actions to consolidate political power in 1996, a relative lack of transparency in decision-making, and the discouragement of public criticism generally speaking—the latter the legacy of the ANC's exile culture of democratic centralism. In short, ANC political culture undermined independent regulation of the telecommunications sector.
Sign up with Google
