Political will could call an end to high-cost paralysis
THE government’s Accelerated and Shared Growth Initiative for SA (Asgi-SA) identified six binding constraints that need to be overcome if the key national goal of broad-based 6%-plus gross domestic product growth were to be reached by 2010.
One of these is the excessively high cost of doing business in SA. A key component of this is telecommunications costs, which are way above the norm of competitor and comparator countries, and which provide a brake to growth across virtually all sectors of the economy. The great frustration for business is that prices have so clearly been too high for many years, and yet progress in bringing them down has been very slow.
In 2005, Business Leadership benchmarked South African telecoms prices against a 15-country group of comparators, and found local prices to be more expensive than the average on nine out of 10 products, and the most expensive of the group on five products. This pricing exercise has been repeated for 2007 prices, and the results of the new exercise will be released shortly.
What the new exercise will illustrate is that, although there have been incremental improvements in South African prices over the past two years, prices in competitor countries are dropping too. The result is that South African prices remain uncompetitive and incremental price changes have been inadequate in addressing the gap. What is needed is a large stepwise adjustment in price. The only way SA is likely to experience such stepwise adjustment is from firmer price regulation in the short term and strongly enhanced competition between operators in the short-to-medium term.
The Independent Communications Authority of SA (Icasa) has the ability to regulate prices in telecoms markets if competition is not sufficient to discipline prices. Yet the Electronic Communications Act places an extraordinary burden on the regulator in order to implement this. The act places the onus on Icasa to conduct market studies and demonstrate ineffectual competition before implementing any cost-based regulation — itself a substantive task. Furthermore, Icasa must conduct such studies without strong administrative powers to gather information from operators.
To its credit, Icasa has initiated the market studies in most markets, including the key international bandwidth and national wholesale markets. However, given this onus, Icasa requires far greater financial and technical resources, as well as greater information gathering powers if this process is to be accelerated and a stepwise reduction in wholesale prices achieved in the near future. Alternatively, the onus should shift to better resourced and informed operators to demonstrate why regulation is not necessary.
Icasa also requires political support to drive through these regulatory processes and the cost-based regulation that may result. The call to strengthen the capacity and independence of Icasa by the ad hoc parliamentary committee on chapter nine and related institutions is a positive development. It now needs to be followed through with clear support from the communications department and the Presidency.
Regulation is never a long-term replacement for strong competition, so it is important to simultaneously support the development of specifically infrastructure competition. Such competition must remain the primary focus of policy makers and regulators alike. Infrastructure competition on a scale sufficient to seriously constrain the pricing of the current dominant operators is taking longer than expected to materialise. In part, this is the result of policy and regulatory delays in issuing new licences and awarding spectrum to a long line of eager entrants.
Once more, a clear political commitment to a policy of unrestrained competition — supported by a licensing and spectrum regime that supports such a policy, along with strengthening the financial and technical position of Icasa to rapidly implement such a policy — is critical to get this process moving rapidly.
As we are painfully aware, infrastructure rollout takes time, and during the process of entering a market, new operators may initially see little reason to compete too aggressively on price, when there is little necessity to do so.
Capital constraints may also delay network rollout for new entrants without a significant customer base generating earnings (such as Neotel) or vast cash reserves. It is seemingly for this reason that the government has embarked on a third aspect to policy, the initiation of infrastructure projects through state enterprises. Some of these may be positive developments, others less so.
The state-owned Infraco has acquired the national telecoms network — that is, the trunk capacity — of Eskom and Transnet, which it will initially sell exclusively to Neotel. This will apparently be done on the basis that reasonable cost-based prices charged to Neotel are passed through to the benefit of downstream service providers.
Infraco has also recently announced an investment in an international undersea cable to increase capacity and lower the cost of international bandwidth. The projection is that they will charge a third of what Telkom currently charges.
This development may well be positive if the end result is that it ensures that infrastructure is rapidly available at cost-related prices, plugging a short-term gap left by price regulation or private infrastructure competition. It will not be positive if it crowds out investment in infrastructure by private operators that strengthens infrastructure competition over the medium term.
For instance, if the state decides to protect Infraco investments by restricting the ability of private companies to invest in infrastructure, then the net outcome is an undermining of a policy of competition in infrastructure. The recent difficulties that the Seacom initiative has experienced with the communications department in getting landing rights for its undersea cable is a case in point.
Similarly, the initiative to use Sentech as a national champion for rolling out rural wireless broadband infrastructure would also appear to harm a policy of competition. Spectrum for wireless broadband, unlike fibre optic cables, is a scarce resource and awarding it to one company usually means that other companies must go without. Making Sentech the national champion and awarding it spectrum will therefore crowd out potentially better-placed private companies willing to invest in infrastructure.
This is worrying given the poor track record of Sentech in delivering quality telecommunications services. The net result is likely to be an inferior and expensive service which delays real delivery for years and may ultimately be protected from competition as has occurred in the recent past.
The cost of failing to bring down telecoms prices rapidly is most evident in the call centre/business process outsourcing (BPO) sector that was viewed as holding much promise for economic growth and employment across business and government alike.
Last week’s announcement of a deal with Telkom for lower international prices for three BPO investors after two gruelling years of negotiation may be too little too late for this sector. There is a distinct danger that SA’s BPO sector has been turned into an also-ran competitor, rather than a world beater, and as a result we may fail to realise the potential to create tens of thousands of jobs.
A special carve-out deal also indicates the clear lack of progress made on bringing down general telecoms prices to the benefit of all business, not just three BPO investors.
In order to ensure that we are not still bemoaning the lack of progress in two years’ time, a firm political commitment to competition and firm regulation needs to be made, backed up by the necessary financial and technical resources for Icasa to implement policy rapidly and effectively.
In addition, state-owned infrastructure initiatives that undermine this policy need to be abandoned.
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