Big changes to black ownership rules for Internet service providers in South Africa
Communications minister Solly Malatsi has issued a policy direction instructing the ICT sector regulator, Icasa, to address legal problems with its equity ownership rules.
In addition to confronting long-standing concerns about requiring all Internet service providers to be minimum 30% black-owned, it would also introduce Equity Equivalent Investment Programmes (EEIPs).
EEIPs have been a controversial topic since Malatsi first proposed them, as they would offer an alternative path for Starlink to launch in South Africa.
Critics have argued that EEIPs would enable Starlink and others to circumvent South Africa’s black economic empowerment (BEE) laws.
However, Malatsi’s policy direction stated that there was little evidence to support this claim.
“As the ICT Sector Code itself recognises EEIPs as contributing to BBBEE, this is not a legally sound argument,” he said.
“The sole purpose of the policy direction is to promote and support empowerment and transformation initiatives already in place in terms of the ICT Sector Code under the Broad-Based Black Economic Empowerment Act.”
Malatsi’s policy direction singles out problematic regulations that the Independent Communications Authority of South Africa (Icasa) published over four years ago.
On 31 March 2021, Icasa published the “Regulations in respect of the Limitations of Control and Equity Ownership by Historically Disadvantaged Groups (HDG) and the Application of the ICT Sector Code”.
Under these regulations, all network operator, service provider, and radio frequency spectrum licensees would need to be 30% black owned.
It superseded existing provisions in the Electronic Communications Act, which required licensees with national footprints to be 30% owned by historically disadvantaged groups (HDGs).
HDGs include black people or citizens who are women, youth, or people with disabilities. “Black people” generally means South African citizens who are ethnically African, Coloured, or Indian.
Icasa’s black-only provision in its new regulations was extremely controversial, resulting in the Authority suspending its implementation until an indefinite future date.
This plunged South Africa’s entire telecommunications industry into a state of uncertainty, with smaller players disproportionately affected.
Shortly after Icasa introduced these new regulations, Starlink amended its African rollout plans to deprioritise South Africa and focus on other territories instead.
An accidental broadband revolution
Icasa had embarked on a project to reform its ownership equity regulations because compliance among licensees was low.
However, to understand how that happened, it is necessary to go back twenty years — before the Electronic Communications Act of 2005 (ECA) came into effect.
Under the previous Telecommunications Act of 1996, there were many licences for different types of networks.
These included licences for public-switched telephone services, mobile networks, international services, and private networks. For everyone else, there was the Value Added Network Service (VANS) licence.
The law also explicitly stated that only Telkom was allowed to operate a local access network until the Minister of Communications said otherwise.
When the ECA replaced the Telecommunications Act on 19 July 2006, it dramatically simplified the licences and included a mechanism for converting old licences to the new regime.
This was to facilitate the so-called “managed liberalisation” of South Africa’s telecommunications sector, hopefully ending Telkom’s decade-long monopoly.
Instead of licences for different types of services — which wasn’t very future-proof — the ECA essentially had two different licence types and two licence classifications.
The two types were Electronic Communications Network Service (ECNS) and Electronic Communications Service (ECS).
An ECNS licence allows licensees to build and operate physical networks, whereas an ECS licence lets them offer telecommunications services.
These can be issued as either “individual” or “class” licences. An individual licensee can operate nationally, whereas class licences are regional (although this initially had a different meaning for ECS licences).
Under the direction of the late former minister Ivy Matsepe-Casaburri, Icasa published a list of VANS licensees who would be converted to an I-ECNS licence.
These licensees would be permitted to build their own physical network infrastructure, like Telkom, Neotel (now Liquid), Vodacom, MTN, and Cell C.
Some of the VANS licensees that were left off the list launched a legal challenge against Icasa and the minister in what became known as the “Altech case”.
The case dragged on until August 2008, when the Pretoria High Court ruled in favour of Altech and all other VANS.
Matsepe-Casaburri ultimately chose not to appeal. By November of that year, Altech’s win was final. Icasa had to convert all VANS licensees to I-ECNS licences.
The minister’s capitulation meant Altech and about 300 other voice and data carriers could all build their own network infrastructure.
Several of these VANS licensees were small businesses, ranging from sole proprietorships to companies with fewer than a dozen employees.
This means many did not meet the 30% HDG ownership requirement, but thanks to the government’s bungling of the ECA transition, they got I-ECNS licences anyway.
As a result, the South African government accidentally sparked a boom in South Africa’s telecommunications industry. A vibrant and fiercely competitive sector emerged.
The Vumatel breakthrough
Although it took several years for true competitors to Telkom to rise, players like Dark Fibre Africa (DFA) began laying the foundation soon after the Altech case.
When DFA’s backhaul and wholesale network service reached a critical mass, it helped enable Vumatel and the Parkhurst Residents and Business Owners Association to open the floodgates in 2014.
Vumatel and Parkhurst showed that the models being used to determine the financial feasibility of suburban fibre rollouts were flawed.
Parkhurst proved there was consumer demand by running a survey among community members, and showed there were many operators willing to build them a network by accepting bids through a tender.
It ignited a craze among South Africa’s leafy suburbs. Several had soon published their own tenders. These tenders soon became unnecessary as a fibre land grab ensued.
By March 2019, just under five years after Parkhurst, Vumatel had overtaken Telkom’s Openserve as the largest fibre-to-the-home provider in South Africa in terms of homes passed.
At the same time this industry boom was taking off, Icasa instituted an inquiry in 2014 regarding the industry’s low levels of ownership by historically disadvantaged groups.
Unfortunately, Icasa’s inquiry did not seem to recognise that its own failure to issue new I-ECS and I-ECNS licences since 2010 was a key culprit.
It also didn’t seem to recognise that making it easier for young entrepreneurs to launch telecommunications companies would boost participation from black people.
Instead of considering ways to further liberate a sector where small businesses had flourished, Icasa began drafting updated regulations in 2020 to crack down on it.
Fortunately, Icasa’s new regulations don’t impact new industry titans like Vumatel, which are already B-BBEE compliant.
However, it disproportionately hurts the small businesses and one-man Internet service providers that have quietly been contributing to South Africa’s broadband revolution for over 20 years.
Malatsi issues final policy directive
Malatsi’s policy direction instructs Icasa to revise its controversial 2021 regulations to align with the Amended Broad-Based Black Economic Empowerment (B-BBEE) ICT Sector Code.
He said that the direction has regard for “the need to promote numerous policy goals for the sector in relation to the availability, accessibility and affordability of communications services”.
It also takes into account the contribution to investment and competition that can be made by international entities, and considers the overriding provisions of the BBBEE Act.
In addition to aligning its regulations with the ICT Sector Code, Icasa is directed to take account of government’s national economic inclusion policy goals.
Within the scope of its own powers and duties under the ECA and the Icasa Act, the regulator must give effect to these policy goals.
Malatsi said that, as far as possible, Icasa must ensure parity among licensees and promote the rollout of broadband to bridge the digital divide.
Icasa must also ensure the preservation of South Africa’s digital sovereignty by encouraging adherence to South Africa’s data protection and data security policies.
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