Give the markets a proper chance

To get broadband to everyone, South Africa doesn't need some complex, government-funded plan. By Duncan McLeod.

Duncan-McLeod-180-profileGovernment, well intentioned as might be, could be on the verge of committing a serious blunder in its attempts to sort out South Africa’s poor broadband penetration rates — one that could stunt and distort the telecommunications industry for years to come.

Communications minister Yunus Carrim is expected to present a final draft broadband plan to cabinet soon for approval. This plan is expected to lead next to the national treasury directing taxpayers’ money — possibly billions of rand of it — into the construction of a national broadband network (NBN) of some shape or description.

Much of this money will be used for infrastructure roll-out in rural and underserved areas.

Already, Telkom is lobbying hard to be appointed as the company that rolls out the NBN. Its group CEO, Sipho Maseko, met with finance minister Pravin Gordhan this week, presumably to press home why he believes Telkom is best placed to do the job.

This is troubling, for a number of reasons. At a debate this week, two analysts from telecommunications consultancy BMI-TechKnowledge argued the issue eloquently from opposing sides, setting out the pros and cons of having an NBN funded by national treasury and built by Telkom. But the flaws in the NBN model quickly became apparent — to me, at least — as the analysts set out their respective arguments.

The most obvious problem is that creating a monopoly supplier immediately leads to the potential for abuse. Telecoms monopolies need to be policed by a strong regulator — and South Africa doesn’t have one of those. An efficient and competitive market is always preferable to bureaucratic interference. And are we to trust Telkom, which has a history of anticompetitive behaviour, with not taking advantage of the situation, even assuming the project is carefully policed?

Even now, Telkom appears far from realising that its future success is intimately tied to close collaboration with the Internet service provider industry it’s spent so many years fighting.

Before embarking on yet another misadventure in the telecoms industry, government should consider where the real successes in the sector have come from. It should realise that its involvement in the sector is the problem.

Look at Sentech, which was granted a licence and a big chunk of spectrum in the mid-2000s to take on Telkom in the consumer market. It botched that, at huge cost to taxpayers. Broadband Infraco, also owned by the state, was licensed to compete with Telkom’s national long-distance network. It has not delivered on its mandate and, frankly, has no raison d’être. And does anyone remember former communications minister Ivy Matsepe-Casaburri’s underserviced-area licensee project? The Usals were set up to fail.

The big successes have been in mobile. Despite a somewhat cosy duopoly between MTN and Vodacom — recently made much more uncomfortable by Cell C and its CEO Alan Knott-Craig (who, tragically, suffered a stroke this week) — South Africa’s mobile penetration, as measured by active Sim cards, is approaching 140%. Even if actual subscriber penetration is closer to two-thirds of the population, as some have estimated, the enormous success of the mobile industry cannot be denied. The fixed-line market, which should be growing strongly, too — on the back of demand for broadband in urban areas — is shrinking. That’s an indictment on Telkom.

Telkom boss Sipho Maseko met last week with finance minister Pravin Gordhan

Telkom boss Sipho Maseko met last week with finance minister Pravin Gordhan

South Africans have a predilection for making things complicated, and debating the issues from every angle ad nauseam. This can be seen in the endless workshops and colloquia that achieve little.

To get broadband to everyone, South Africa doesn’t need some complex, government-funded plan. What the country needs to do is facilitate competition by making it easier for anyone to enter the sector and for private capital to invest in building both fixed and wireless networks. In other words, get rid of the red tape.

At the same time, grant access to spectrum that is in high demand to those that have the balance sheets to put it to good use. Then allow that spectrum to be traded freely. And craft regulations that encourage infrastructure sharing to reduce costs.

This is far preferable than tapping an already-stretched national budget to fund what could turn out to be a white elephant.

  • Duncan McLeod is editor of TechCentral. Follow him on Twitter
  • This column was first published in the Sunday Times

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  • Greg Mahlknecht

    While I used to agree with the sentiments of this article – it’s become apparent to me that the market is not capable of delivering what is needed. All they’re good at is making excuses.

    In wireless broadband, they keep saying more spectrum is the magic bullet that will fix everything, but that’s at odds with my experience of terrific speeds on all the networks in highly populated areas (city centers, shopping malls) where spectrum should be scarce, and embarassingly pathetic coverage and speeds in outlying suburbs where spectrum certainly isn’t an issue. They aren’t using the current spectrum properly. I have zero faith that the wireless operators could offer a solution good enough to provide the necessary connectivity to the country’s population to make them competitive in the global economy.

    Fixed broadband is even worse – Telkom isn’t great at it, but they beat the market by miles. I haven’t seen any excuses for non-delivery from the market which stand up to scrutiny. Red tape? There’s none of that in housing developments, where DFA has gigantic pipes running past and body corporates would welcome FTTH projects with open arms. In fact, I know a number of people living in developments which do have the Mweb Smart Village FTTH solution, but they ALL use Telkom ADSL because it’s just better. Telkom is now doing 100mbit FTTH trials, and I happen to know a few people in one of their trial housing estates, I’ll be keeping a close eye on that.

    “Success” in broadband penetration should be measured by a useful metric more in line with the aim of connecting people, like streaming a decent resolution educational video for a reasonable cost. If this were the case, I’d be surprised if the mobile operators got more than 10% coverage on the speed side, and pretty much 0% on the cost side. Telkom’s fixed lines would probably fare better on the penetration, but fail as miserably on cost.

    Yes – we need to get rid of the red tape. But nobody’s proven they can deliver solutions where there is no red tape. And, yes – I’d prefer a bunch of private companies to connect the country – but right now, Telkom’s the lesser of all the evil options out there. Doing nothing (which is what the market has been doing for the last decade) certainly isn’t an option.

  • ads

    I think Duncan has summarised this excellently in the first line: “Government, well intentioned as might be, could be on the verge of committing a serious blunder”. In most countries, the news that the government has a plan for broadband, and wants to subsidise the rollout, would be excellent news. In South Africa, it is deeply depressing, a sign of yet another industry to be crippled by government.

    Where governments have intervened successfully to drive broadband rollout, the focus has been where the key investment needs to be – in the last mile. It’s not wrong for government to subsidise the rollout of FTTH in urban areas, and wireless alternatives in the rural areas, and the SA government could do this easily by leveraging the expertise of those companies that have shown they can do it – Neotel, MTN, Vodacom, perhaps even Telkom if they can handle anything other than copper, and quite a number of smaller, efficient fibre and wireless players. What is doomed to failure is any strategy that involves taking demonstably, proven incompetent state-owned players in this space to lead a national broadband network.

    Broadband Infraco has done far worse than just not deliver on its mandate. It has actively damaged the industry, and failed to offer proper services. It has had to be bailed out by its shareholder, its revenue has declined to a fraction of what it was initially, and the only thing that is saving it from actually being declared bankrupt is a shareholder who continues to prop it up. Operationlally, it’s a complete mess – ask any of the operators who have tried to buy or use its services recently.

    Sentech has been smarter under its current leadership, and exited completely from the broadband space, and returned the related spectrum to ICASA. It is now focussed on running TV, radio and satellite transmitters, which is what it was set up for.

    Frankly, the USALs were doomed to failure before they started, and are barely worth a mention except as a footnote in the history of telecoms in South Africa.

    We have reached the point that we have in South Africa – national fibre rollout by competive players, massive metro fibre network deployments (albeit not yet FTTH), multiple new submarine cables, and huge declines in the price of broadband – as a result of private investment, and a competive market. There is a nascent FTTH market, which is predicted to grow substantially, if the right models are in place, if government is a faciliator (e.g. stopping the local authorities from trying to be jumped-up telcos themselves while refusing permission to others), and if the economics can be made to work (given South Africa’s geography and income distribution). The two key regulatory issues that could have helped substantially to date – Local Loop Unbundling, and issuing more 4G spectrum – have been blocked continuously.

    Here is a much simpler plan for government to promote the growth of broadband:
    – Shut down Broadband Infraco, and sell its assets to productive companies
    – Stop local government from attempting to run telcos competing in the sector
    – Put in place regulations to enable rapid deployment of last mile infrastructure
    – Release 4G spectrum to players who have proven that they can use it properly

    – Separate Telkom into wholesale and retail, keeping the local loop in wholesale
    – Unbundle Telkom’s local loop, and create tough LLU regulations
    – Consider subsidising fibre (or wireless) rollout by private players, on a fair basis

  • Tim Parle

    Hi Greg.

    I want to pick up on your point about spectrum being scarce in highly populated areas. Allocations and assignments for access spectrum are currently made on a national basis (I can think of only one exception with Amathole in the Eastern Cape), so the amount of spectrum that the operators have in the rural areas is the same as in the metro areas. The difference is that in the metro areas there are more users sharing this same finite resource. For capacity requirements, the operators have to reuse the same spectrum more times over in the metro areas. The operators invest hundreds of millions of Rands each year in network optimization which entails site (re)planning, relocation and antenna improvements plus backhaul improvements. The operators’ argument is give them more spectrum, then there will be more per user (Hz/sub) and hence better service levels. Also, since LTE is so much more efficient than previous generations (spectral efficiency measured in bits/Hz), the user experience will be better….

    WiFi offload will become vital in the coming years to alleviate capacity constraints in the metros, allowing the access spectrum to be better used for mobile applications.

  • Greg Mahlknecht

    My concern is that, as you point out, in the less populous areas, there are less users sharing the finite spectrum resource. Yet their coverage and speeds are far worse. Even in towns such as my own (30,000 people in 24km^2) there’s awful coverage and speeds – if you want decent bandwidth at home here, ADSL is your only option. If they operators can’t get this right, what hope is there of them spending money to push out decent bandwidth to the underserviced areas, where this is needed?

    I’m not trying to defend Telkom, I think both them and the private companies are terrible at providing internet access to the masses. There’s no company you can really say is doing an excellent job, the best one can hope for is seeing who does the least crap job – right now it’s Telkom.

  • Outrider

    The first paragraph summaries it well. Follow the international examples – indiscriminate government intervention leads to an absolute mess – look no further than Australia’s NBN Co.
    If there is to be direct intervention – follow the Polish example – break the country down into small logical areas – a couple of hundred of them – do an audit to work out what is and isn’t needed, then use the Brazilian model to determine if the area firstly needs intervention and secondly that if intervention is needed will it kill the nascent industry. Then set some challenges for the existing operators, e.g. Neotel/ Telkom to see what they can come up with and only if all else fails then directly intervene.
    The concerning thing here is that that this is such a golden opportunity to both fix the broadband issues, but also to encourage small business in rural and other areas – and set them up in partnership with the Telkom’s / Neotels of South Africa.

  • Greg Mahlknecht

    Kind of off topic – you’re deep in the industry, perhaps you or someone else knows what’s happening with Link Africa? They’ve had fibre destined for FTTH in the ground outside my house for over a year. I spoke to OTEL a while back who indicated they might be able to offer me a service over their infrastructure, but after quite a lot of back-and-forth, they told me they’ve ceased business with Link Africa as they (Link Africa) are not in a good position financially. Here we have a company with fibre going past hundreds of pretty high income houses who have very sketchy ADSL because of interference of monkeys and distance from exchange – a perfect market of low-hanging fruit – but can’t even make that work.

  • http://www.acaciaeconomics.co.za/ Ryan Hawthorne

    Using Telkom to roll out a national broadband network would simply entrench Telkom’s dominance over fixed line services, and risks repeating history where Telkom was mandated to roll out fixed lines in return for a statutory monopoly but chose to pay a fine instead of doing so. South Africa has recently seen very successful reverse auctions (where bidders bid to supply services at the lowest cost) in the electricity sector, which resulted in significantly lower renewable energy prices at each stage of the bidding process. A reverse auction would be a far better means of government subsidising the rollout of infrastructure in areas that truly need it, where operators could bid to supply services on a competitive, location by location basis. The fact that the national broadband plan does not currently mention Local Loop Unbundling, which has been government policy since 2007, is testament to the fact that the Department of Communications is reverting to its role as the protector of Telkom, at the expense of the public.

  • Greg Mahlknecht

    I like that Polish model… a lot of the work has been done for the voting wards; they all of similar population count and are geographically centered around a significant permanent structure, it could be a good start.

    I spoke to someone who told me Telkom has a proven model to award work to their infrastructure subcontractors; suppliers are veto’ed to become a subcontractor, then work is offered to them on a round robin basis; they’re weighted according to how well they do the job and their suitability to the task, and if they mess up they don’t get any more work.

    Something like the Telkom tender award combined with the bite-sized geographic chunks could work well. And most importantly, competence must rewarded with more work.

  • HorseOfPangor

    “interference of monkeys” – Greg Mahlknecht

  • Greg Mahlknecht

    Yes, monkeys. They run along the wires to get onto the house roofs. Just thought I’d clear that up – it looks pretty bad out of context :)

  • Outrider

    Ryan,
    Looking at Telkom’s comments in other articles (if reported correctly) it does appear as if they are on one hand desperately trying to mend bridges to get a slice of this project, but also setting the scene to be paid for it. Not sure if it is their strategy to position themselves as just one more player in the market but it looks as if they have inadvertently done that anyway. Almost looks as if they have taken themselves out of the “favoured position”.
    Having said that we are also not seeing the other players publically jockeying for position either.

  • http://www.acaciaeconomics.co.za/ Ryan Hawthorne

    One of the reasons that the renewable energy reverse auctions worked (and were begun in the first place) is because they were run by the National Treasury and the policymaker in the sector, the Department of Energy, who are not responsible for the government’s investment in the incumbent (Eskom): the Department of Public Enterprises is. The telecommunications sector is less fortunate: the policymaker is also responsible for the government’s shareholding in Telkom, which creates a conflict of interest. It is difficult to see how any other players will be able to enter the market under these circumstances.

  • Joe Black

    Communism… Go figure…

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