Lipstick on a pig

A plan to allow equity equivalent programmes in South Africa’s ICT sector, while a brilliant political move, does not solve the problems caused by forcing all network operators and service providers to be 30% black-owned.

Communications minister Solly Malatsi recently announced that he intends to issue a policy direction regarding equity equivalent programmes for urgent consideration by industry regulator Icasa.

While this would open a door for Elon Musk’s SpaceX to launch its satellite broadband service, Starlink, in South Africa, it has broader industry implications too.

Malatsi’s plan comes more than three years after the Independent Communications Authority of South Africa (Icasa) issued regulations requiring all national network operators and service providers to be 30% black-owned.

It should be noted that Malatsi was only appointed as minister this year. He and his colleagues had previously railed against these changes from the opposition benches in Parliament.

Icasa suspended the implementation of its new black ownership provision until an undetermined future date following industry backlash. However, it can enact these pending regulations at any moment.

In the meantime, the existing local ownership requirements of the Electronic Communications Act (ECA) remain in effect.

It stipulates that national telecommunications providers must be 30% owned by historically disadvantaged groups.

As defined in the ECA, historically disadvantaged groups (HDGs) include black people and citizens who are women, youth, and people with disabilities.

However, even though the ECA has included black economic empowerment provisions since coming into effect in mid-2006, they have not been strictly enforced.

This is thanks to a legal misstep by the late former Minister of Communications, Ivy Matsepe-Casaburri, which resulted in her and Icasa being dragged to court in what became known as the “Altech Case”.

At the heart of the issue was Telkom’s monopoly over fixed-line broadband infrastructure and how Value Added Network Service (VANS) licences under the old Telecommunications Act would be converted to the ECA.

Essentially, Altech and its allies argued that all existing VANS licensees should be automatically converted to a new licence that would allow them to build their own network infrastructure.

Although the case dragged on until August 2008, the Pretoria High Court ultimately ruled in favour of Altech.

Matsepe-Casaburri chose not to appeal, finalising Altech’s by November of that year.

The minister’s capitulation meant Altech and about 300 other voice and data carriers could all build their own network infrastructure — many of which did not meet the 30% HDG ownership requirement.

Several of these licensees were small businesses, ranging from sole proprietorships to companies with fewer than a dozen employees that would never have been able to qualify.

As a result, the South African government accidentally sparked a boom in South Africa’s telecommunications industry.

Although the impact wasn’t immediate, a vibrant and fiercely competitive broadband infrastructure sector emerged over the next decade.

For many, it might be difficult to imagine a world before South Africa was awash with fibre operators like Vumatel, Frogfoot, Metrofibre, Octotel, and Herotel.

However, not too long ago, if you wanted uncapped broadband, there was essentially one option — Telkom DSL.

That all changed in 2014 when Vumatel broke ground in Parkhurst, igniting a land grab among the country’s fibre network operators.

It also forced Telkom’s hand.

After spinning out its wholesale and networks division into a subsidiary called Openserve in 2015 and intensifying its own fibre rollouts, it was forced to cut prices to keep pace with Vumatel and the rest.

At the same time this industry boom was taking off in 2014, Icasa instituted an inquiry into the industry’s low levels of ownership by historically disadvantaged groups.

This also dragged on, with Icasa only moving ahead with draft regulations in 2020.

It published the final regulations in March 2021 that included its black ownership provisions despite several warnings and pleas from the industry to adopt a more nuanced approach.

One of the most prominent examples of the chilling effect of Icasa’s regulations was Starlink’s hesitation to launch in South Africa.

Although SpaceX never confirmed that this was why it halted its South African plans, well-placed industry sources have said Icasa’s regulatory changes were absolutely to blame.

Malatsi also didn’t say as much in announcing his plans, but implementing an equity equivalent scheme was clearly a way to help SpaceX obtain the necessary licences in South Africa without selling a 30% stake in its local entity.

Equity equivalent programmes allow companies to fulfil the requirements of BEE ownership through alternate means.

However, while Malatsi’s plan offers a workaround, it doesn’t address the fact that Icasa’s regulations are poorly formed.

At the very least, they should recognise the importance of small and medium-sized businesses and allow them to qualify for national network and service licences.

As the Internet Service Providers’ Association (ISPA) noted in its submission to Icasa regarding the regulations, the old VANS licences only had to comply with equity ownership provisions if their income was greater than R1 million.

The threshold would be around R2.85 million today if adjusted for inflation from 20 May 2005, when those VANS regulations were published.

Setting profit thresholds for ownership equity compliance is a distant second prize, though.

Ideally, the ownership requirements should be done away with entirely.

South Africa’s SME telcos have flourished without them, and forcing them on small businesses that are earning a decent living for one person and their family now is more than an insult — it’s poor judgment on the regulator’s part.

Why break something that is clearly working?

Suppose industry participation by black people is low, as Icasa claims. In that case, the solution is not to implement more onerous regulatory requirements — it’s to make it easier to enter the market.

ISPA has previously noted that Icasa last issued new national network and service licences fourteen years ago.

The only way to obtain a licence is to buy one from someone who is already licensed, which can cost up to R1 million each, which ISPA highlighted was a massive barrier to entry for young, black entrepreneurs.

In fairness to Malatsi, his room to manoeuvre here is limited.

He can’t order Icasa to change its regulations, and amending the ECA would take years. Saying anything negative about BEE is also politically risky.

That said, it remains deeply frustrating to read his statement regarding equity equivalent programmes given the broadband context.

“Equity equivalents, recognised in other sectors, provide an avenue for factoring in alternative ways for companies to make an impact on South Africa’s socio-economic development,” Malatsi stated.

Companies offering broadband services are already making one of the greatest contributions to South Africa’s socio-economic development of any industry.

This is even more so for services like Starlink, which can provide fibre-like broadband to remote areas where it is financially unfeasible to roll out fibre, 4G, or 5G.

To Malatsi’s credit, he subtly points this out.

“World Bank research shows that, on average, every 10% increase in broadband penetration results in 1.21% GDP growth in middle-income countries such as South Africa,” Malatsi said.

“Broadband access makes it easier for people to start businesses, grow businesses, seek employment, work remotely, and market goods and services,” he continued.

“Giving millions of South Africans access to broadband would therefore constitute one of the biggest empowerment programmes the South African government has ever undertaken.”