Stimulating investment in network extension: the case of South Africa

1. 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

2. 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

3. Developing country review New developments International lessons Causes Strategies Outcomes • 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

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

5. Developing country review New developments International lessons Causes Strategies Outcomes Size of SA Telecom Sector* *Billions of Rands Source: ITU World Telecommunications Indicators Database (2002), Telkom IPO Prospectus, 2002 MTN Annual Report, 2002 BMI-Techknowledge Communications Handbook

6. Telecommunication Investment per capita US$

7. Telecommunication Revenue per inhab. US$ 2002

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

9. Sources: Residential monthly telephone rental: 1997 - 2001: ITU World Telecommunications Indicators Report 2003 2002 - 2004: Telkom Annual Reports Residential telephone connection charge: 1997 - 2001: ITU World Telecommunications Indicators Report 2003 2002 - 2004: Telkom Annual Reports 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

10. 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

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

12. * 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

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

14. Developing country review New developments International lessons Causes Strategies Outcomes • 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

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

16. Developing country review New developments International lessons Causes Strategies Outcomes • 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

17. Developing country review New developments International lessons Causes Strategies Outcomes • 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

18. Developing country considerations New developments International lessons Causes Strategies Outcomes 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

19. Developing country review New developments International lessons Causes Strategies Outcomes • 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.

20. Developing country review New developments International lessons Causes Strategies Outcomes • 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??

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