Vodafone's Investment in South Africa: A Success Story

1. Vodafone presentation to the Parliamentary Portfolio Committee on CommunicationsConvergence Bill[B9-2005] 17 August 2005

2. About Vodafone Group Plc • World’s leading mobile telecommunications company with more than 165 million proportionate customers from 27 countries across 5 continents • Wholly listed public company, listed on London and New York Stock Exchanges

3. Vodafone in South Africa and Africa • Vodafone is immensely proud to be an investor in South Africa • Investor in Vodacom since 1993, Vodafone holds 35% shareholding • The South Africa success story has encouraged Vodafone to invest directly or indirectly (through Vodacom) in 8 other African countries to date

4. Vodafone’s investment in South Africa • Essential component of success stories was significant upfront financial capital invested to commence network rollout and operations and to begin providing mobile communications in South Africa in 1994 • This financial investment by Vodafone and other investors was made in very different circumstances to today • 1993/94 was a period of significant political change in South Africa • Mobile communications was a new and emerging technology • 35 million mobile subscribers worldwide, 1m using GSM technology • South Africa had limited telecoms subscription and usage history • Less than 10% telecoms penetration • Investment was not only an investment in a new country, with limited telecoms history, it was also an investment in a new technology • Importantly, investment was a long-term commitment to the new South Africa emerging

5. Vodafone’s partnership with Vodacom • In addition to providing financial investment, Vodafone is a partner providing commercial, operational and technological support to Vodacom • Vodacom benefits from synergies that come from Vodafone’s experience of providing mobile services in many countries and being world’s leading mobile telecommunications company • Vodacom has combined these synergies with its local experience to build an innovative, sustainable, and successful business model tailored to the South African market • Most visible current example of this partnership is Vodacom’s ability to regularly bring world class and leading-edge mobile communications products and services first to South Africa

6. South Africa mobile communications success story • Mobile communications has increased access to telecommunications services beyond most optimistic estimates • 36 mobiles per 100 people in South Africa at end of 2004 • Compares favourably with • fewer than 3 mobiles per 100 people in sub-Saharan Africa • just over 3 mobiles per 100 people in India • 31 mobiles per 100 people in Brazil • Success story has encouraged mobile operators to invest significantly in South Africa – more than 50 billion Rand to date • South African mobile communications industry has become a model for the rest of Africa

7. Wide socio-economic benefit generated by mobile communications success story • Significant contribution to meeting Government ICT and wider socio-economic objectives • Efficiencies created through increased ability to communicate with others • Enterprise development, employment and skills development opportunities within mobile communications sector and connected sectors • Economists calculate that African countries which increase long term average number of phones per 100 people enjoy 0.59 per cent higher annual GDP growth

8. Conditions which led to this success story • A partnership between government, the regulator, investors, and the local industry • Key conditions have been: • government telecommunications policy framework which provided certainty and clarity of market structure • a light touch regulatory environment which has allowed the market to develop without excessive regulatory intervention • upfront financial investment and continued commercial and operational support provided by investors • the emergence of strong performing companies that have built innovative and sustainable commercial business models tailored to the demands and characteristics of the South African market

9. Need to continue these conditions • When reviewing the Convergence Bill and the changes that a new legal and regulatory framework will bring to the market… • It is important that the Committee works toward ensuring that such changes continue the conditions which led to this success story… • It is also important to assess if and identify how the new legal and regulatory framework could better achieve national ICT policy objectives than the current legal and regulatory framework

10. An investor’s perspective on the Convergence Bill • Vodafone endorses the presentation given by Vodacom to the Committee in June 2005 • Vodafone wishes to provide a different perspective – one as a foreign investor • See us as a proxy for potential investors • Investment is critical for continued development and growth of the ICT sector, and the meeting of Government ICT and wider socio-economic policy objectives

11. Investor analysis of legal and regulatory environment when making investment decisions • Investors will analyse legal and regulatory environment when making decisions to invest in new opportunities or reviewing existing investments • Investors will assess a legal and regulatory framework on the criterion of certainty, clarity, and transparency • Particular areas of focus are: • licence rights and obligations • regulatory decision-making procedures (e.g. wholesale and retail service regulation, dispute resolution, appeal rights) • Failure to meet these criterion in these areas may deter investors and may cause difficulties in implementing the legal and regulatory framework

12. 3 areas of focus on the Convergence Bill • Licence Framework • Regulatory Decision-making Procedure • Conversion of Existing Licences

13. (1) Licence Framework • Licence Framework provides foundation for the market structure • Essential that the Licence Framework provides certainty and clarity • Bill is undermined by the failure to provide clear and precise definitions for different licence categories • Failure to be consistent with use of defined terms in definitions • Legacy of 2003 draft Bill – definitions have not been wholly revised to take account of separation of broadcasting services from “converged licence regime” in 2005 Bill • Difficult to understand what types of services are to be licensed under which licence category • Implementation of proposed Licence Framework will be difficult • Fundamental review is required

14. Licence Framework – Malaysian experience instructive • Introduction of new market players have come at Applications Layer, not at the Network Facilities and Network Services Layers • Regulator supportive of consolidation at Network Facilities Layer • Access and service regulation determined following market dominance assessment ”The issue of NFP licences is consistent with the position taken by government over the last five or six years with respect to the consolidation of the network operators as a means of minimising wasteful duplication in expensive network investments… We should avoid a repeat of the situation that occurred less than ten years ago when there was a big outflow of funds from Malaysia from various players for the purchase of network facilities that remained under-utilised for many years” MCMC press release 2002 http://www.cmc.gov.my/newsdesk/press/ViewPressRelease.asp?cc=29519446&prrid=226635

15. (2) Regulatory Decision-making procedure • Chapters 7,8, and 10 of the Bill fail to provide sufficient clarity and precision on regulatory decision-making procedures in relation to wholesale and retail services • Bill is undermined by use of multiple tests, in some cases undefined, which creates unnecessary complexities and inconsistencies of approach when regulating such services • “insufficient competition”, “significant market power”, ineffective competition”, “essential facilities” • Mechanism needs to be streamlined – most jurisdictions use one test for regulation of such services (e.g. European Union, Australia, Malaysia) • Clear and precise provisions are required on: • the grounds for commencing such regulatory decision-making procedures • the steps required to be taken in such decisions • the criterion on which regulatory decisions are made

16. Regulatory Decision-making procedure – Ineffective competition test • Terminology might vary, but essentially regulatory intervention is only required to address proven forms of ineffective competition • Two broad categories of ineffective competition: • Proven market failure (“ex-ante regulation”) determined by a competition law based test such as market dominance or significant market power test set out in sector-specific legislation • Anti-competitive behaviour (“ex-post regulation”) set out in the general competition law (e.g. excessive or predatory pricing, cross-subsidisation) • Vodafone supports this approach

17. Regulatory Decision-making procedureneeds to be fundamentally reviewed • Chapters 7, 8, and 10 of the Bill need to be fundamentally reviewed • Lessons can be learnt from failure to provide clear and precise regulatory decision-making procedures on wholesale and retail services in the current Telecommunications Act • Vodafone supports text proposed by Vodacom in Annexure A of its written comments on the Bill • A further point of reference is Part 7 of Industry Drafting Committee Document submitted to DoC in November 2003

18. (3) Conversion of existing licences • A key requirement for encouraging investment is certainty • On the basis of licence rights and obligations, existing licensees have made significant investments which have made a significant contribution to the South African communications success story • Significant uncertainty for existing investors will be created by the Bill’s failure to expressly provide that existing licence rights and obligations will not be materially changed in the licence conversion process unless agreed to by the existing licensee • A concerning precedent for potential investors, who will want sufficient comfort that their licences will not be materially amended unless for reasons provided in their licences and in legislation, and with their agreement

19. Conversion of existing licences needs to be reviewed • Sections 84 and 85 of Bill 2005 needs to be reviewed to address this serious concern • Section 64(4) of draft Bill 2003 included wording which went some way to addressing issue (but this wording does not appear in Bill 2005) • Vodafone supports text proposed by Vodacom in Annexure A of its written comments on the Bill

20. Concluding comments • It is essential that changes brought about by the Convergence Bill builds on the success stories to date and ensures continued growth of a vibrant communications industry • For the Convergence Bill to achieve this, it must provide: • a policy framework which provides certainty and clarity of market structure; • a light touch regulatory environment which allows the market to develop without regulatory intervention unless justified by proven ineffective competition; • a legal and regulatory environment that encourages continued financial investment and commercial and operation support by investors; and • a legal and regulatory environment that encourages innovation and the development of strong performing companies based on sustainable commercial business models tailored to the demands and characteristics of the South African market

21. Concluding comments continued • Convergence Bill, as it currently stands, from an investor’s perspective, fails to achieve these requirements in three significant areas: • lack of clarity and certainty with respect to the licence framework • failure to provide regulatory decision-making procedures for wholesale and retail services that is clear and precise and is consistent with leading regulatory practice • failure to protect existing licence rights and obligations in the licence conversion process • Vodafone is keen to work with the Committee and other stakeholders to address these areas to ensure that the Convergence Bill provides a sound legal and regulatory framework which builds on the success stories to date and ensures continued growth of a vibrant communications industry in South Africa

22. Thank you for providing this opportunityWe would be happy to answer your questions on this presentation