Stimulating investment in network extension: the case of South Africa Alison Gillwald gillwald.a@pdm.wits.ac.za World Dialogue on Regulation Asia Expert Forum LIRNEasia, Sri Lanka, September 2004

South Africa fact file 1994 Constitutional democracy – protects property rights, economic activity, statutory organisations, robust rule of law Country size 1,219,912 sq km with mixed terrain Population 42 million (Africa 850 million) Urbanisation 50% unemloyment 35% GDP $500billion, per capita income $10 500 Highest Gini Co-efficient in the world Dual economy ICT 8% of GDP

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Africa 1% fixed line teledensity at turn of millennium Transfer of costs of network development to private sector Telecom reform model as investment strategy Privatisation (30% Telkom – SBC, Telekom Malaysia, IPO in 2003) Liberalisation (Mobile, VANS, PTN, CPE) autonomous regulation (SATRA > ICASA) Universal access (Universal Service Fund and Agency) Targets to contribute to national objectives of affordable access and network modernisation

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments World FDI Flow (%)

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Size of SA Telecom Sector* *Billions of Rands    The telecommunications sector is increasingly important to the overall health of the South African economy. In the ten year period between 1992 and 2001 the revenue generated by the sector grew from R7 billion to R56 billion (ITU (2002); BMI-T (2002), Link Centre Analysis). In the process it grew from representing 1.9% of South Africa’s GDP to 5.8% of its GDP. In this sense South Africa has performed very well in South Korea telecommunications only represented 4.3% of GDP in 2001. Figure 1.1 breaks down the contribution of the various parts of South Africa telecommunications sector to the total revenue generated by the sector. As can be seen both the size and the composition of the sector has change dramatically over the past ten years as Vodacom, MTN, and the competitive VANS providers have entered the market. The composition of the sector continues to change as Cell C entered the market in late 2001 (and was therefore not included here) and the SNO will probably come on to the scene in late 2003 or early 2004. Data services, which include leased lines, Internet, corporate networks, and virtual private networks, continues to grow and now represents 12% of the sector, or just under R7 Billion – approximately equal to the size of the entire sector in 1992. Source: ITU World Telecommunications Indicators Database (2002), Telkom IPO Prospectus, 2002 MTN Annual Report, 2002 BMI-Techknowledge Communications Handbook

Telecommunication Investment per capita US$

Telecommunication Revenue per inhab. US$ 2002

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Total telephone density

Sources: Residential monthly telephone rental: 1997 - 2001: ITU World Telecommunications Indicators Report 2003 2002 - 2004: Telkom Annual Reports Residential telephone connection charge: Cost of 10 hours worth of calls: 1997 - 1999: ITU World Telecommunications Indicators Report 2003 2000 - 2004: Telkom Annual Reports Total fixed-line telephone lines per 1000 inhabitants: Telkom Annual Reports

Note: For South Africa and Poland the data is only up to 2001 Note: For South Africa and Poland the data is only up to 2001. For Argentina, there are no stats after 1999 Source: ITU World Telecommunications Indicators 2003

Note: The RHS axis denotes subscribers per 100 inhabitants Source: ITU World Telecommunications Indicators 2003

* 2004 amount is an estimate based on average increase since 1997 Sources: % growth of total internet subscribers: The Goldstuck Report: Internet Access in South Africa 2004 Fixed line cost: 1997 - 2000: ITU World Indicators Report 2003 2000 - 2004: Telkom Annual Reports Average ISP costs: www.internet.org.za

Source: World Wide Worx: The Goldstuck Report: Internet Access in South Africa 2004

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments WTO compliance with SA commitments 30% privatisation saw US$1.2 billion purchase price and US$10 billion in network investment. Duopoly in mobile and competition in VANS Focus on maximisation and protection of value of state assets Managed liberalisation – structural conflict on interest, policy vacillation, regulatory bottlenecks IPO - US$500 million raised from 25% share Share price $2.5 in 2003 to US$7 in 2004 Empowerment objectives – Ucingo – raised capital for equity Mobile investment in network expansion – $5 billion Second phase – SNO, Multimedia and International Gateway Licence – parasatals Under Serviced Area Licence – 10 of 30 licences processed, 7 granted – internal investment Third phase – Convergence – legacies of protection, some just lifted

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Low High Regulatory stability Cash extraction Investment returns Credit Support Political stability Competition Credible sponsor Government relationships Controlling shareholding Financial Institutions Operators Source: SATCC (2003) Policy and Regulatory Harmonisation in the SADC Region, PPIAF and World Bank

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Political and economic stability Policy Focus on privatisation at expense of liberalisation of market and on optimisation of state assets and maximisation of privatised incumbents revenues. Market structure vertically integrated incumbent who competes downstream against competitors required to get non-competitive elements from them creating anti-competitive incentives Institutional arrangements Creates highly resource intensive regulatory regime – regulator constantly monitor anti-competitive behaviour of incumbent Access regulation Tariff regulation Interconnection Resource allocation USA - Obligations and levies Not achieved economic or social objectives - resulted in high prices, ineffective roll out and chilling effect on competitive sectors, ISPs, VANS and drag on national economy with little regulatory relief

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Inefficient investment and network development Reduced investment in fixed network development and SNO unlikely to compensate for this. Competition between three state operators unlikely to result in effective competition and innovation Limited competition in mobile greater investment efficiencies and network utilisation Longer-term public interest views of the strategic need for investment in knowledge infrastructure overridden by shorter-term maximisation of value on licence fees and sector levies, monopoly profits, and high share prices - resulting from a lack of regulatory restraint of the incumbent combined with unsustainable social goals. Incumbent significant residual power and ineffectual access regime little success in creating innovative and competitive environment necessary for network economy

International lessons Developing country considerations Outcomes International lessons Causes Strategies Developing country considerations New developments Access strategy Conclusions Demand for communications services innovatively met through strategic policy and regulation of market forces Gaps in market can be cost effectively filled by enabling alternative operators to come into areas regarded as unprofitable by incumbents eg. Chile. Pre-paid mobile services show flexible access, billing and payment can bring low income subscribers onto networks and provide profitable business case for investors. Need to create more affordable service through improved market efficiency which can be driven by increased competition and new cost effective technologies. Effect of increasing competition and participation, increased calling opportunities, economies of scale in volumes of traffic and cost of equipment, push down prices stimulates demand Short terms focus on value of state assets at expense of sector development should shift to consideration of fiscal impact of licences Taxes paid by telecommunications licencees to the Treasury in the 2003 financial year amounting to over R2 billion (US$300million). Unrestricted liberalisation of market not likely to achieve competitive or development objectives and increases regulatory burden

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments Review timing and sequencing of liberalisation and effectiveness of regulation Remove structural conflicts of interest and artificial restrictions on market development Structural separation allow for development of retail market on back of wholesale market for interconnection Structural separation creates competitive incentives, easier to set tariffs for non-competitive essential facilities, due to separation of the component parts and accounts With tariff fee structure sufficiently above cost and no business unit to protect downstream, incentive to encourage access . Reduce regulatory burden and less resource intensive Common to success stories integrated strategies for development of human capital.

International lessons Developing country review Outcomes International lessons Causes Strategies Developing country review New developments SNO equity partner to break management control impasse Lifting of restrictions on VOIP, facilities self provisioning, resale result frenzy of service based competition with associated regulatory overload. Some self provisioning may drive down wholesale and retail prices and improved range of integrated business services. Competition should result in reduced retail prices with regulator commitment of firm Rate Review but Telkom tied up business market in long term contracts, SNO may compete on wholesale and high end prices (ADSL) but roaming on incumbent network Under Serviced Area Licensees undermined little support from state essentially franchisees with little new build out. Investment in rural backbone??

Alison Gillwald LINK CENTRE Research ICT Africa! LIRNE.net http://link.wits.ac.za www.researchICTafrica.net http://www.lirne.net