Papers, Presentations & Publications
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Attracting Investment for Competition to Telkom The Government's Conflict of Interest After the telecom second network operator (SNO) selection process failed to attract a major foreign investor partner, the Minister of Communications has announced she will pursue a process of confidential negotiations with potential foreign investors. Thus the representative of the government´s 65% ownership share in Telkom, which is preparing to sell a 25-30% share to foreign and domestic investors at a public offering in March, will at the same time be negotiating the license conditions for a SNO to compete with Telkom. Although this process is permitted under the existing legislation, the inherent conflicts of interest will significantly reduce the chances of success, and the lack of transparency of the process calls into question whether any "successful" result could possibly be in the public interest. Potential foreign investors would find a major investment in Telkom to be highly preferable to a SNO license, were it not for the Golden Share provisions that guarantee a government controlling interest in Telkom for another eight years. This will ensure that a SNO is not permitted to make significant competitive inroads into Telkom´s profitability or market share. To attract investment in a SNO, the Minister will have to offer potential investors special privileges. But this must be done within a framework of preserving the government´s ownership interest in Telkom, as well as the special privileges it previously granted to the Thintana Group (SBC and Malaysia Telkom) when it purchased a 30% ownership share and management control of Telkom in 1996. The contracts specifying the rights and obligations of Thintana, which still has never been made public, continues to be the subject of much speculation with respect to the government´s vigorous protection of Telkom´s monopoly financial interests, and will be a matter of concern to potential foreign investors in the SNO. The Failures of " Managed Liberalisation" The only potentially "positive result" of the Minister´s negotiations will have to be a government protected duopoly that ensures a negotiated reasonable share of the fixed line network market to the SNO, restrained price competition with Telkom, and government protections against further competition (and therefore further investment) for wholesale or retail services for an extended period – eight years might be a reasonable speculation. It could even include a request from potential SNO investors that the government abandon, or severely restrict, its policy to allocate eight fixed network regional licenses to underserved areas, now in process at the Independent Communications Authority of South Africa (ICASA), the telecom regulator. This may be seen as a potential threat of competition for the SNO, even though it is unlikely to be interested in serving local markets in rural areas. Any special privileges providing government protection from competition for the SNO would conflict with South Africa´s commitments on telecom liberalisation to the World Trade Organisation (WTO). Concerns of this nature are not new and were recently raised by the international community following the amendment of the South Africa Telecommunication Act in 2001. Any special privileges would also raise the barriers to effective telecom reform and the development of an e-economy and information society in South Africa, conflicting directly with e-economy government policies and NEPAD objectives. It is difficult to see how "success" in SNO negotiations can result in anything but a major step backward in South Africa´s telecom reform process, which according to the International Telecommunication Union (ITU) has been falling behind other comparable countries for several years. The government has attempted to justify its practice of selectively awarding privileged licenses to specific operators for particular services, protected by restrictions preventing competition, as a "managed liberalisation" policy. In fact, it has been a government enforced cartel, restricting investment opportunities and competition in virtually every market in the sector, including both facilities and services cutting across fixed network, mobile, national and international, voice, data, Internet and e-economy markets. Potential innovative investment possibilities are rendered impossible on a regular basis by the "managed liberalisation" policy restrictions. Experience has shown that cartel market management restricts investment by providing protection to the privileged licensees who need not fear direct competition, and by preventing investment by other participants that would in turn stimulate greater investment, efficiency and market development by the privileged licensees under such circumstances. Neither the benefits of public monopoly or market liberalisation are achieved. Credibility of the Licensing Process The structural arrangements for attracting major foreign investment in telecom and other infrastructure sectors in any country are by now well known. With the assistance of local and international experts, potential foreign investors can assess the commercial and market risks of investing in most countries, including South Africa, reasonably well. But investors are uncertain about the risks of political interference jeopardizing their business opportunities, and about the monopoly power of the incumbent operator (Telkom), with whom a SNO requires interconnection in order to reach most of its customers. A November 2001 survey of local business leaders by Ernst & Young and BMI Techknowledge found that "the main theme, repeated time and time again…" as to what "the biggest inhibitors or challenges to growing a [telecommunications] business in South Africa…was the regulatory environment." In countries (developing and developed) that have attracted significant telecom investment, an independent telecom regulator has been established. Among its tasks are to ensure a fully informed, objective, transparent, and credible implementation of the government´s communication policies, and fair treatment of competitors and customers in their dealings with the incumbent monopoly. Although South Africa has established a telecom regulator, ICASA, it is independent in name only and it has very little authority. By international standards established by the WTO and other organisations, ICASA does not qualify as an independent regulatory agency. Under the telecom law, almost every ICASA decision must be approved, and can be vetoed, changed unilaterally or delayed indefinitely by the Minister. Many ICASA decisions have been changed on the basis of ex-party influences of political interests and Telkom. The licensing of the third mobile operator was mired in political controversy, with the Minister's decision never justified and most observers convinced the Minister´s selection was based on confidential political factors, not the relative merits of the applicants. Following this process, one international financial expert noted, "there is not more than one foreign investor [winning bidder Cell C] that would be happy to recommend South Africa as an investment destination after this process." The government´s announced policy for fixed network competition initially was to license two competitors to Telkom, but then it was reduced to one after insider lobbying. A recent example shows the extent of detailed Ministerial interference on behalf of Telkom. After reviewing the evidence put forward by Telkom to justify its proposed price increase for 2002, ICASA decided that the evidence justified only a smaller increase. Telkom had used an achievable productivity improvement figure of 1.5% in its calculations. ICASA concluded a more realistic figure would be 3%. After Telkom lobbying, the Minister pressured ICASA into changing the figure back to 1.5%, without public justification or presentation of evidence, thus allowing Telkom its greater price increase. (This writer has calculated Telkom´s actual productivity improvement in recent years at 10% per annum or higher, resulting primarily from drastic reductions in its labour force.) In addition, ICASA´s hands were tied by the Minister with respect to Telkom´s price increase of 9.5% for 2003. This increase was supposedly justified by Telkom on the basis of the high rate of consumer inflation for September 2002 created by the sudden increase in the price of maize and related foods. Telkom´s costs were declining. (For a detailed analysis, see http://link.wits.ac.za/research/wm20021130.htm. Ensuring the SNO Selection is Political For the SNO license, ICASA has implemented a transparent process for assessing applications on their merits, conducted public hearings examining the evidence, and provided a public justification for its decision finding that, 1) neither applicant satisfied the established requirements for foreign investor partnership; and 2) recommending that the best way forward is for the South African partners – Eskom, Transtel, and Nexus Connexion – to be awarded the 49% of the SNO license they were entitled to, and the remainder to be warehoused until a suitable partner with equity could be found. The most straightforward way to find a foreign investor partner would be to authorise the South African partners to find one that they were happy with and that satisfied the established requirements. This would significantly increase the chances of finding a satisfactory partner and developing a successful venture. This is after all the way most successful partnerships are formed, not by a unilateral decision by a less informed third party. When a satisfactory partner was found, the arrangements would still have to be approved by ICASA as consistent with the stated requirements and policy objectives. But this rational option was not considered by the Minister, presumably because it would remove the decision of selecting the foreign partner from the Minister and political interests – which is what independent regulation is supposed to do. It would place the selection decision of the foreign partner in the hands of the key South African players whose only objective would be to get a good financial and technically competent partner, roll out the second network as soon as possible, and provide some long overdue competition for Telkom – precisely what the government´s policy aims to achieve. But that would weaken the Minister´s direct control over the selection of all the key players in the sector as part of the government's managed liberalisation policy. Further indication of ICASA's marginalisation was the failure by the Department to consult it prior to the announcement of a new process, despite its obvious superior expertise on all aspects of the SNO issue that it has been immersed in for some time. Its belated inclusion into the Ministerial Committee to conduct confidential negotiations with potential foreign investors reflects an incredible lack of understanding of the centrality of independent and credible regulation to instilling confidence in potential foreign investors. The message that potential investors have been getting consistently from the South African government throughout its telecom reform process is that the political risks of unilateral, unjustified government intervention are extremely high, in fact so high as to be expected as a matter of course. Continuing Ministerial influence on behalf of Telkom must be expected. The regulator does not have the legal powers necessary to require Telkom to treat competitors or consumers fairly, or even to make independent decisions on their merits that can be implemented. All decisions of consequence are made by the Minister on confidential political grounds. The government evidently views its financial interest in Telkom as an absolute priority that overrides the implementation of its own e-economy and information society policies, or the NEPAD objectives. The fundamental reason there were no major foreign investors interested in the SNO license was because investors knew that the lack of independent regulation meant the process was not credible. The telecom legislation grants the Minister virtually absolute powers for unilateral intervention. Whatever decision the regulator might make, it would be subject to unilateral Ministerial veto or change reflecting undefined political interests and/or Telkom influence. Potential investors know well by now that the path to obtaining a license is through confidential political negotiations with the Minister and the government. There is nothing to be gained by showing their cards for public examination on the merits by ICASA. The Minister´s chosen method for resolving the current SNO licensing matter confirms this beyond question. It reflects the government´s continuing failure to follow transparent and credible processes in implementing its own communication policies. Attracting Fixed Network Investment The necessary conditions for attracting a SNO are straightforward:
ICASA is now preparing a process to invite bids for eight regional licenses in under-serviced areas of South Africa. If this process is to have any hope of success in attracting investors and establishing conditions for financial viability in these higher cost and lower income areas, ICASA will need to adopt a proactive role in implementing this mandate. By announcing in its invitation for bids that the principle of cost-based interconnection prices with the established operators will be applied, including cost-based call termination prices in high cost areas, financially viable proposals are much more likely to be attracted. Whether or not the new regional operators can recover their higher costs of terminating calls in their respective regions will be the key factor in determining the success or failure of this policy. In addition, by charging minimum application and licence fees, providing an expedited process for assessment, and straightforward, objective, selection criteria based on the speed and magnitude of network rollout, the possibilities for financially viable proposals are raised further. By implementing these principles in a timely and effective manner, telecom services in under-serviced areas may be improved dramatically and provide a stimulus for economic development in currently depressed regions. (See, http://link.wits.ac.za/research/usal.htm.) But this will all depend upon the Minister allowing ICASA to get on with its policy implementation responsibilities, and resisting the lobbies of Telkom and the myriad other self-serving special interests tempting her to continue the centralised managed liberalisation cartel policy of Ministerial selecting of licensees on confidential political criteria. Sooner or later the government must come to understand that effective implementation of its telecom policies requires a credible and transparent regulatory process, and give ICASA the "independence" and "authority" implied in its name. Then perhaps "managed liberalisation" will be replaced by market liberalisation, ample foreign and domestic investment directed to South African telecom/ICT market development will begin to flow, the diversity, quality, and prices of services will improve dramatically, the fixed line penetration rate will begin to increase rather than decline, and some of the many thousands of employees made redundant by Telkom will find job opportunities. It is disheartening to observe how South Africa´s impaired communication policy and regulatory structure is holding back development of its telecom industry, its ICT sector, its e-economy and its information society. In a vibrant democracy that has achieved miracles in other areas during the past eight years, this is untenable. A credible policy and regulatory structure must be established to unleash the enormous economic and development potential of this country. 
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