South African Telecom Companies: Caught in a Cultural Warp?

Transcription

1 Research Brief South African Telecom Companies: Caught in a Cultural Warp? Abstract: Repeated attempts to build a social framework around a planned Western-style deregulation of telecom companies have failed in South Africa. Commercial entities will continue to shy away from this potential gold mine. By Bhawani Shankar and Wm. L. Hahn Recommendations Gartner Dataquest advises overseas investors and telecommunications operators to continue to view investment in South African telecom companies with extreme caution through at least the remainder of Stable legislative and operational frameworks are unlikely to be available during this period. Telecom operators interested in the South African market are strongly advised to work with the Department of Communications rather than the regulator, as the former is clearly for now the executive of telecom policy in the country; consider working with Telkom South Africa rather than its potential competitors; and consider waiting until end of 2003 before taking decisive action. Investors, equipment vendors and telecom operators interested in the market are advised to pressure the government to empower the independent telecom companies' regulator with real powers to enable it to execute an optimal environment for competition. The South African government should conduct a strategic review of the telecom deregulation process and reconsider measures to make licensing and competitive framework more attractive to overseas operators and investors. Publication Date:6 March 2003

2 2 South African Telecom Companies: Caught in a Cultural Warp? No Second Operator for Now in South Africa The process of telecom companies' deregulation in South Africa, which began, for the most part, in 1998, has been subjected to regular bouts of analyst, media and market bashing. The latest twist in this tangled and prolonged saga could invoke the question as to how serious South Africa is about a venture that is bound to have extensive, much-needed economic impact and for which millions have been waiting for several years. Much as Gartner Dataquest had predicted (see "About-Face in South Africa: Consequence of the New Telecommunications Policy" [TELC-WW- DP-0079), a highly convoluted South African telecom deregulation process has stalled once again. On 30 January 2003, South Africa's telecom companies' regulator, the Independent Communications Authority of South Africa (ICASA), rejected both bids for the majority stake in its proposed Second National Operator (SNO) as being inadequate. Current regulation requires the SNO to be 51 percent held by an overseas investor operator. But the majority stake comes with social strings attached: strictures that make it mandatory for the new licensee to work with a local agency for promoting Black empowerment and which will hold a 19 percent stake in the SNO. As well, it is expected that contributions to a Universal Service Fund will direct expensive network deployment at extra-urban areas, whereas most commerce and competition is naturally expected to remain in city centers. In a market that is yet to develop extensively, such long-term investment requirements coupled with a trying economic climate have kept many likely suitors away, and the current bids have been judged to be wanting. The muchvaunted onset of competition in South Africa's wireline telecom companies market, which could have been as early as May of last year, is now yet again unclear. ICASA recommended in its report to the Department of Communications (DOC) that Transtel and Esi-tel (state-owned transportation and power utilities with communications infrastructure forming the heart of the new SNO) be issued a license to operate immediately. Meanwhile, the majority stake would be "warehoused" with a financial player for the short term. However, the minister of the DOC decided on 5 February to instead invite bidders to apply and negotiate in closed sessions, starting later this month and scheduled to award the stake before summer. Gartner Dataquest believes this proposal to be fraught with legal problems and, hence, the possibility of an award to be low. Proceed to "Go," Don't Collect Investment The tangle of South Africa's attempts at liberalization defies description, much less analysis. A feisty incumbent operator, backed by experienced litigators in its management partners, has so far outgunned ICASA on most important issues. Telkom South Africa, still 67 percent held by the government, has made strong profits in the two years since competition 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 6 March 2003

3 3 became possible by jacking up tariffs to the maximum allowed (and has won fights with ICASA over their legitimacy). Negotiations over the structure of competition have been bogged down at almost every turn, and the government, which is also the majority owner of Transtel and Esi-tel, is hopelessly compromised in its attempts to arbitrate. The potential for more delay in licensing the SNO spurred ICASA to suggest a shortcut to the process and eliminate for now the need for an overseas investor. Transtel and Esi-tel had urged the award of an immediate license, with a warehoused stake held by some financial player, to get competition started earlier rather than later. The fact that the advent of competition has pulled down thee share price of Telkom's March 2003 IPO (from an expected $5 to $6 to about $3.50) is only one way in which the government finds itself caught between a rock and hard place in this process. That money is badly needed indeed, already assigned to answer debt obligations, and when the 30 percent share is sold, the government will still be the largest single owner of the former incumbent operator. Other Attempts Also Hamstrung Aside from the pressing issues of SNO licensing and the incumbent IPO, South Africa's telecom market has seen false starts and reversals on a number of other issues, including: An early move to license a third network operator along with a second in July The plan was amended a month later to attempt only one new entrant, with others envisioned as early as the fourth quarter of A move to include broadband and fixed-wireless licenses with the incumbent and SNO franchises. Each element came under fierce protest from smaller private operators and the mobile players, and neither has been spoken of publicly in months. Provisions to allow for small businesses and other entrepreneurs to provide services on owned or leased infrastructure, as an exception to Telkom's wireline monopoly, in areas with teledensity lower than 5. Such businesses could utilize Voice over IP (VoIP) technology (otherwise also forbidden) and were to be exempted from the obligation to contribute to the Universal Service fund. Up to 29 licenses to serve the remote provinces were originally contemplated in the amended telecom companies law of summer 2001, and bidders were expressly invited to apply for the first 10 such licenses in December 2002, but the effort came under fire from all sides. Potential bidders complained that published and official estimates communicated to them regarding their setup costs varied too widely. Both Telkom and the mobile players challenged the government's teledensity calculations in certain regions. This process, too, has been largely on hold a prominent example of the vicious cycle between interest and funding. No mention is made of plans to further the privatization of any of the major telecommunications players: The government remains committed 2003 Gartner, Inc. and/or its Affiliates. All Rights 6 March Reserved. 2003

4 4 South African Telecom Companies: Caught in a Cultural Warp? A Regulator That Can Regulate in all its public documents to the "mixed state" philosophy, which is long on rhetoric and short on details. Absent any action, the government will remain the controlling stakeholder in both major contributors to the SNO and the largest cellular operator (through its control of Telkom) and will completely control the second international operator. An IPO for a 20 percent share in Telkom was once scheduled for November 2001; it finally happened in March The first remedy that Gartner Dataquest has suggested for some time is to arm the regulator to take decisive action on the framing of the regulation as well as its enactment. Presently, ICASA is secondary to the DOC in both these tasks. Significant parts of the legislation (which went through successive, painstaking revisions in parliament over the past two years) are those that ICASA has not actively recommended. The most recent proceedings for the SNO license, in which ICASA found both bids fatally inadequate, were angry and have led to threats of legal action. Then, the regulator saw its suggestion of an immediate license award ignored in favor of a closed, rather than open, proceeding, in what is just another slap in the face of the national regulatory authority (NRA) by the government that should be supporting, or at least coordinating efforts with it. What is critically needed for South Africa is for the government to take the required steps to establish ICASA as a truly independent regulator, with the defined authority over telecom competition and the enforcement powers to punish anti-competitive behavior in the marketplace. This includes the willingness as well as the ability to delve into complex and expensive matters such as interconnection fees, true number portability and other vital elements of the regulatory regime. Only then will potential players see the chance for reliable return on their investments (ROI) and react with plans that extend basic connectivity and advanced services needed for the next-generation telecom market. Gartner Dataquest ranks the world's national telecom markets on a fivestep scale indicating progress toward a fully open and competitive status and has forecast this liberalization ranking to Consult the upcoming Focus Report on worldwide trends in telecommunications liberalization in Coming Out of the Cultural Warp An even more acute requirement is for South Africa to conduct a strategic review of the kind of legislative framework it is putting into place. For a country that has a blatantly inequitable distribution of wealth, infrastructure (including telecom) and facilities, public policy is quite properly aimed at addressing basic needs of the masses that do not have access to even basic telecom companies' services. The licensing of Telkom's competitors is, therefore, predicated on increasing teledensity as well as putting in place a network that does more than merely concentrate on profitable telecom services to business Gartner, Inc. and/or its Affiliates. All Rights Reserved. 6 March 2003

5 5 Understandably, building national telecom company infrastructure is a long-term exercise that requires not only investment but also a certain degree of stability in the legislative framework that is put in place. The dilemma for overseas operators eyeing South Africa as a potential investment market, including many of the leading telecom carriers of the world, is stark. The present policy translates into significant upfront investment (which these carriers likely do not have) and holds no hope of returns in the midterm (a prospect that their investors and shareholders would veto). The solution to this dilemma lies in adopting a new approach to the telecom regime, which takes into account the need to redirect the former public telecommunications operator (PTO) into a role in which its longterm usefulness is preserved. This creates the best possible climate for the new entrants, not only to compete with the former incumbent for existing customers, but also to expand service to the underserved on a stable platform. Thus, it gives present and potential future investors a clear demonstration of the value in all players, creating an atmosphere where reasonable ROI is possible. Further detail on the elements of this new recommended regime can be found in the Gartner Dataquest Perspective "The Shepherd's Choice: The Middle East and Africa Need a New Regulatory Model" (TELC-WW-DP- 0173). Gartner Dataquest believes that the South African model of deregulating telecom companies is caught in a "cultural warp" that is Eastern in its aims but Western in its ways. Many Eastern countries have embarked and some have succeeded in addressing the problems of poor teledensity by enacting "social" legislation. China, for instance, seems to be aiming to accomplish a task several times the magnitude of South Africa. But this has been done with a strong element of federal ownership or "stakeholdership" combined with a tightly controlled entry of private investment. A more Western-style telecom deregulation as practiced, for instance, in the United States and in most Western European countries places strong emphasis on the privatized entities to manage themselves. Where public policy places special structures, such as Universal Service obligations, on either incumbent or competing companies, mechanisms ensure that these are adequately funded and, above all, ensure that the fundamental commercial objectives are still met. Legislators in South Africa must understand that imposing societal strictures on commercial enterprise will not be feasible at least under the current regulatory and licensing framework. While social aims must be met, they must be balanced against the need for commercial return if South Africa wants to attract overseas players. The current status also brings into sharp focus the question of what role the government must play in improving telecom companies in South Africa. The Eastern argument seems to be that infrastructure is far too 2003 Gartner, Inc. and/or its Affiliates. All Rights 6 March Reserved. 2003

6 6 South African Telecom Companies: Caught in a Cultural Warp? This document has been published to the following Marketplace codes: TELC-WW-DP-0332 importanttoletgoof anoptionthesouthafricangovernmentdoesnot seem to favor. In that case, other avenues to explore would include: Lowering the universal service strictures so that investment can be more attractive, and then mandating that some of the operator revenue be channeled into a universal service fund. Setting up an independent financing consortium, with public and private participation, which acts as a guarantor for overseas operators and investors. This consortium would need to be held at arm's length from government control. The Universal Service agency called for by South Africa's 1996 Telecom Act is an example of this. An independent agency represented by all sectors of domestic business and empowered to administer the fund could facilitate a vitally needed and mutually beneficial increase in teledensity through its involvement. Several vertical industries in South Africa contribute substantially to the nation's gross domestic product (GDP) and would be well-positioned to be active in such an agency, while also fulfilling the likely empowerment goals. Considering how economic development of extra-urban areas could be linked to telecom infrastructure development, so that the telecom industry can work toward a tangible plan in conjunction with the local economy. Especially in a facilities-based environment, the government should provide direction to the competitors, providing incentives for them to develop in areas that are not completely overlapping. Without any of these measures, ICASA, the DOC and the government risk repeating the comic errors that the industry has, so far, not taken favor to. Key Issues What companies will lead the way in the development of telecom technology? What will be the impact of regulation, government policy and operator privatization on public network services? For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice