Mixed signals
Ironically, both seem to want the same thing – lower telecoms prices – but most agree it’s taking far too long, to the detriment of the country’s economic development. The private sector overwhelmingly blames Government for this situation. It wants Government to lay off, but the State is taking steps to increase its influence.
The latest evidence of increasing State involvement is in the form of Infraco, a Government-owned telecoms infrastructure provider that bought the fibre-optic backbone originally built by Eskom and Transnet for the second national operator (SNO, now Neotel).
Government did an about-turn on the assets, deciding rather to retain these and establish its own infrastructure company.
Finance Minister Trevor Manuel put R647m aside for Infraco as part of his medium-term budget policy statement last October and said in the Budget in February that additional contributions to Infraco and Sentech – contingent on the approval of their business plans and outstanding regulatory requirements – would be made out of the adjustments budget.
Neotel has initial exclusivity to sell Infraco’s bandwidth on a "see-through" basis, in terms of agreements originally negotiated with the then-SNO. But in time this exclusivity would fall away.
Not only is it a battle between Government and business, but an apparent one within Government. Falling under the Department of Public Enterprises (DPE), Infraco seemingly pits minister Alec Erwin in a power play against Department of Communications (DoC) minister Ivy Matsepe-Casaburri, despite Government assertions of a united front.
Both departments say the business of Sentech, the DoC’s envisaged national wireless broadband vehicle, and Infraco, the DPE’s backbone network capacity provider, play in a different space so there’s no conflict between them.
But surely pooling energy and resources would be better?
Government is the arbiter of the industry, through the Department of Communications, and gives legislation and policy guidance to independent regulator Icasa – though some do question its independence. But Government also owns various telecoms assets. As well as Infraco (the most recent) there’s a 38% stake in Telkom (and the indirect stake in Vodacom through Telkom’s 50% shareholding), and 30% of Neotel via Eskom and Transnet (Eskom plans to divest its stake, however). It also previously held a stake in MTN through the Transnet pension fund, but this was sold in 2004.
Government’s stated rationale for owning ICT assets is to further socio-economic goals in recognition of the sector’s key role in helping to build and grow the economy and bridge the proverbial digital divide.
Some, however, view its motives more cynically.
MyADSL founder Rudolph Muller says the only explanation for the State owning shares in ICT companies is the profits it earns and the control that ownership gives it over the industry. He says Government needs to sell all its assets in telecoms. If it doesn’t, Muller says he holds out little hope it will ever truly liberalise the market.
Sector analyst Irnest Kaplan, MD of Kaplan Equity Analysts, says he understood there was perhaps an element of national intelligence tied up in the sector that needed to be protected, but to do so Government should rather jack up its policies.
"Everywhere in the world it has been proven than the private sector is better than Government at delivering, except maybe in certain public service areas," says Kaplan. "I think they should get rid of everything," he says of its telecoms interests.
James Hodge, Genesis Analytics’ economist in competition and regulatory, is less cynical than consumer activists such as Muller. He says it’s "hard to believe there’s some concerted Government control to fleece the general public". Rather, Hodge puts its efforts down to a recognition that infrastructure of this kind is too important to be entrusted to someone Government can’t control.
Neither does Kaplan think Government’s intentions are malicious. Rather, the slow pace of liberalisation has had to do with a "combination of incompetence, greed and the fact that everything moves so slowly".
Communications department director-general Lyndall Shope-Mafole says Government has no intention of disposing of its Telkom stake.
She says people seem to think of Government as a company with a profit-maximising motive, but the proceeds from Telkom go towards socio-economic development.
Last year, Telkom paid out nearly R5bn in dividends, of which R1,9bn went to Government as a 38% shareholder.
A leading consultant and researcher on ICT in Africa, who did not want to be named -"I have to continue working in this town," – says SA telecoms was in a very strange place. Everything came down to the DoC’s failure to confront Telkom’s de facto monopoly. Because it would not take on Telkom, the department spent a lot of time trying to find a competitor for Telkom, such as Sentech. But he holds out little hope that Sentech will ever be a "real competitor" in the broadband space, describing it as "fairly hopeless commercially".
Shope-Mafole disagrees. She says Sentech – a signal distributor and multi-media licensee – has been a good performer and adds that there have been many offers from interested parties to buy the company. Government envisages Sentech as the vehicle to roll out wireless broadband to remote areas – including providing access to hospitals and schools not connected by fibre – that are not profitable for the private sector to service.
Another industry player, who prefers not to be named, says Sentech has been handed a valuable asset in the form of its multi-media licence and valuable spectrum, but doesn’t know how to make it operational. Icasa should enforce the "use-it-or-lose-it" principle.
Gateway COO Mike van den Bergh says the best route for Government to follow regarding Sentech is to sell off its broadband business to the private sector to enable it to focus on preparing for its 2010 broadcasting role.
In the light of what some perceive to be Government’s failure with Sentech, the industry would rather not see cash poured down another possible black hole in the form of Infraco. Others feel Infraco is a positive development that could help reduce prices.
DataPro MD Gary Sweidan says Government has yet to provide sufficient clarity on Infraco’s role and funding. He says the industry had thought the launch of Neotel marked the beginning of Government getting out of the telecommunications business, but Infraco showed a change of plans.
Hodge says his views on Infraco are contradictory. On the one hand, he says, economic theory teaches that the private sector may run companies more efficiently. On the other, it’s also more efficient at abusing market power. So, he can understand Government’s fears around Neotel; if placing the backbone infrastructure in Neotel’s hands was creating a duopoly, this wouldn’t change the landscape (Neotel itself has articulated no desire to enter into a price war).
Another example of increasing Government involvement in this space, says Sweidan, is the number of municipalities building broadband networks. Most recently, the City of Johannesburg issued a request for information as part of a process to develop a citywide broadband network.
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weidan says bodies such as municipalities should stick to their knitting and let companies that have been in the space for a long time handle the roll-out of telecoms infrastructure and services. Enterprise would deliver on the task and competition would bring down prices, he says: "If you gave us a municipality to run, we wouldn’t have a clue."
The unnamed consultant says there’s substantial debate about using municipal networks to lower the cost of local delivery, and it all turns on whether you believe communications is a public good irrespective of who delivers it.
Government believes it’s a public good, like electricity and water. The problem is that it partially privatised this utility in 1996 with the sale of a 30% stake in Telkom to a strategic equity partner, and after introducing a profit-maximising motive, there was no going back.
Shope-Mafole said if Government had gone down the current route (of self-providing infrastructure, as in the case of Sentech and Infraco) much earlier, it would have been much further down the road than it is now.
Erwin said in response to a question from the DA in Parliament that the formation of Infraco was a "direct intervention to rapidly reduce one of the key cost elements (long distance) of broadband. While the liberalisation will achieve this over a few years, Infraco will achieve the same by early 2007.
Recent assertions by Government that the private sector’s failure to self-provide had made it necessary to step in have left the industry perplexed, particularly after Matsepe-Casaburri did an about-turn on the eve of deregulation measures in 2005 and told value-added network service operators (Vans, for example Internet service providers) they could not self-provide their infrastructure.
Old Mutual Investment Group (OMIGSA) fund manager Steve Minnaar said Government owning stakes in all the various telecoms companies caused a conflict of interests as it was then a player as well as the referee. He believes the Telkom stake should at least fall under the DPE, rather than the DoC.
But, Shope-Mafole said transferring it to a different department wouldn’t make a difference as there was only one Government bank account.
Although Minnaar is against the nature and extent of Government’s involvement in the sector, he doesn’t believe it should not invest. He said given the country’s geographic location and demographics, it was likely that pure private-sector investment wouldn’t be sufficient for the country’s needs.
He points to projects such as Richards Bay, Saldanha Steel and Coega, which stimulated further growth and development, and asks: "Would the private sector have built those?" But, he says, there’s a thin line between stimulating growth and controlling industries.
He asks whether applying the amount of money already spent on Sentech, Neotel and Infraco to the private sector would have achieved the same end result much more quickly and efficiently.
Telecoms analyst Dobek Pater of Africa Analysis said there should ideally be two or three large national networks offering services at a wholesale level and a host of smaller players competing at a retail level so that there were different layers of competition.
Government’s role should merely be to safeguard against collusion in the market by laying the legislative and regulatory groundwork, ensure the policies in place are more friendly to the development of the market itself, and allow the regulator to regulate as efficiently as possible: "Everything else should be left to the private sector," Pater said.
Government cites success stories such as India, South Korea and Malaysia as examples of where state intervention in telecoms has succeeded. But Muller says these are not directly comparable with SA: "It’s effective competition that drove the growth of mobile and Internet services in South Korea. While the Korean government invested in a high-speed backbone, it encouraged smaller competitors to build their own broadband facilities to increase competition in the market. It’s further telling that the Korean government got rid of all its shares in Korea Telecom."
Van den Bergh said that, barring Korea (which was a very different market to SA), there were no examples of a government successfully rolling out a national broadband network. However, there were plenty of examples, such as the US, UK and most of Europe, of how proper market-based mechanisms had achieved much more than state intervention ever could.
He described the State’s attempted intervention through vehicles such as Sentech and Infraco as "misguided – it’s like trying to stick a Band-Aid over a crack in the ice. Sooner or later, the crack is going to open up, and people will fall through into the icy water – the Band-Aid just helps to convince some people there’s no crack and therefore no risk."
Internet Solutions (IS) CEO Angus MacRobert says while it’s difficult to comment on Government’s full strategy and intentions regarding Infraco until there is further clarity – Erwin will present to Parliament before it goes into recess at the end of the month – IS supports the principle of trying to provide affordable access to telecoms.
Unlike the Telkom stake, Government does plan to exit its Infraco investment. Erwin said if its interventions worked, it would sell: "It’s also not Government’s intention to operate Infraco on a long-term basis. Once Government is satisfied that long-distance tariffs have normalised at internationally competitive levels in support of broadband and that privatisation of Infraco will not result in the abuse of market power through predatory pricing, it’s Government’s intention to exit by means of privatisation."
Despite continued negativity towards Government’s performance in the telecoms sector and its intricate links to the fortunes of many companies, there remains some optimism that 2007 can be a "tipping point" in the provision of bandwidth to more South Africans.
Muller says the market will get exciting with the Electronic Communications Act feeding through and allowing self-provision. Already the smaller wireless application service providers are shaking things up – whether they’re yet allowed to is debatable – and so will Neotel. There’ve also been price cuts from MTN in the data space, and the other operators could follow suit.
"It won’t be tremendous," says Muller, "but we will see some further price cuts. Unfortunately, though, Telkom still holds most of the cards by controlling South Africa’s national and international bandwidth."
The anonymous consultant says 2007 could be a milestone "if the local loop (the access network to homes and offices) and the international gateway (access out of South Africa via submarine cable and satellite) are liberalised…"
Telkom stands to lose its exclusivity on key international submarine cable system SAT-3 anytime from the second quarter of this year. This could pave the way for cheaper international access. But what about the local loop?
Matsepe-Casaburri should have an interim report from her local-loop unbundling committee any day now. Shope-Mafole said while local-loop unbundling was Icasa’s responsibility, the committee was trying to determine the shortest possible timeframe in which it could be implemented. She expects a final report by around May.
Another committee, another report, or a real attempt to speed things up?
Forgive the scepticism.
Finweek
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