World Dialogue on Regulation

Abstract

While South Africa was hailed as one of the early starters of telecom reform on the continent in the mid-1990s, investment in the sector has focused on maximisation of state assets at the expense of broader sector development and provisioning of affordable access. State policies to induce investment in the sector through privatisation appear to have been short-sighted and attempts to induce investment in greenfield licences marred by a lack of transparent and contradictory licensing processes. 

Most significantly the strategy for privatisation of the incumbent monopoly coupled with a period of exclusivity and restrictions on liberalisation of market segments has not delivered on national objectives. These included the extension of the network to provide affordable services to unserviced citizens and the acceleration of the development of the network to provide enhanced services required in a network economy. In fact by the end of the five year exclusivity period two million subscribers had been disconnected largely due to high price of services and the critical Value Added Network Services segment of the market in an e-economy, excluding the incumbent’s VANS portion, had shrunk.

The mobile sector has flourished largely because the eyes of government and the regulator have been focused on public switched telecom services. Considerable investments in network expansion have been made particularly by the duopoly mobile operators, Vodacom and MTN, in South Africa and increasingly across the continent.

Extension of facilities based competition in fixed networks and international gateways has resulted in effectively three public network licences in this area with little foreign investment or skills transfer. While the ownership of some of these has been diluted with strategic equity and public ownership, historical legacies in some cases, and policy and regulatory constraints in others, means that South Africa is unlikely to see the relatively high risk investment and market responsiveness witnessed in the mobile sector. 

While difficult to quantify, all evidence suggests that adopting a more open market structure, with an effective competition regulatory regime – such that exposed Telkom to competition with the associated efficiency gains – would have yielded a net benefit to this critical sector of the network economy and better fulfilled national policy objectives of accelerated network development and affordable access.

There is little doubt this would have resulted in significant short-term cost to government, both with regard to the initial privatisation value, premised on an extension of the monopoly, and possibly the share price of the IPO. But even this is an assumption. In fact, what the value of selling Telkom with or without is residual monopoly power would have been, remains unexamined. What is clear from international and local evidence is that determining policy and regulatory frameworks on the basis of immediate benefits for the Treasury will not serve the more strategic national interests of the country in the global economy. Further, any short-term losses that might occur from the creation of a more competitive environment need to be assessed against longer-term growth, which would reduce public expenditures and bolster revenues.

This is unlikely to happen until the structural conflict of interests that exist within the Ministry of Communication is addressed. As long as the Minister remains responsible for optimising the value of state assets in the sector while also serving as the institution responsible for creating a policy environment that is fair and encourages the development of all players in the sector, including the direct competitors to state entities, the short-term interests of state will prevail over the longer-term interests of the sector and the economy.

This paper argues that there is significant evidence that demand for communications services can innovatively met through market forces and gaps in market cost-effectively filled by enabling alternative operators to enter areas regarded as unprofitable by the incumbents. However, their success in every instance in developing countries is dependent on strategic policy and effective market regulation which includes reduced regulatory risk to induce local and foreign investment.