INTERNET SOLUTIONS SUBMISSION ON THE BROADBAND INFRACO BILL.
25 July 2007
1. Introduction
Internet Solutions (“IS”) welcomes the opportunity to submit written comments on the proposed Infraco Bill issued by the Department of Public Enterprises. IS believes that this proposed Bill is a critical important instrument in determining the future landscape of the ICT sector in South Africa, and wishes to congratulate the Minister on its promulgation.
2. The Effect of the Infraco Bill
The South African telecommunications legislative and policy making is at crossroads. The path towards national economic growth and equitable development within the (ICT) sector has been tortuous, given the difficult and sometimes conflicting tasks of liberalization. It is our view that convergence has naturally attracted much attention recently in South
Africa because of the promulgation of the Electronics Communications Act of 2005 (ECA). However, the ECA is not the only way of looking at the market, and not all of the issues facing the country and the sector can be focused through the lens of convergence. Whilst the ECA makes reform a more urgent priority, it must be seen as just one factor in a larger and more complex picture hence we welcome the introduction of the Broadband Infraco Bill.
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A close analysis of the SA communications environment reveals the following:
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The consumer fixed line market is flat on most measures, and significant innovation and reform will be required if the sector is to make any progress in penetrating lower income households. Rises in the cost of line rental and negligible reductions in the cost of local and national phone calls are among the factors that are discouraging use.
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Whilst broadband has made some progress in the business sector the same cannot be said about the consumer market. The high price of broadband is clearly a significant and prohibitive factor, and broadband scene is dominated by one or two operators
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The wireless market has always been thought to be generally in good shape despite limited regulatory intervention as belief was that real competition exists and this will lead to real choice for consumers. However the recent public process conducted by ICASA on wholesale call termination has demonstrated that whilst the South
Africa’s Mobile Operators are delivering some significant social benefits for the country, both in terms of the services they offer and the employment opportunities they created this has come at a high price for the consumers and for voice competition in general . market Study, 11 December 2003
 Data service markets continue to grow, but largely to the incumbent’s benefit. The absence of separate pricing for retail and wholesale services in particular means that competitive operators continue to struggle to build margin into the limited services that they can provide. Indeed, the ‘Network Services’ in the VANS market appears to be largely limited to the IT services and the wide area telecommunications services are sold as a loss leader or are under severe margin squeeze.
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The current focus of competition lies in the provision of services to the larger business market. With pockets not as deep, South Africa’s small, micro and medium-sized enterprises (including sole traders), whose interest in the
Internet is growing, cannot afford to take up some of the services on offer – including newly-launched DSL, which remains an expensive option for most.
In summary, there is strong evidence that suggests that the biggest ills in relation to the SA market lie not at the services level of the market but at the lack of competition at the infrastructure level of the market. With Telkom having operated as a monopoly there has not been many alternatives for services based operators from an infrastructure procurement perspective. This becomes particularly important as affordable access to telecommunications infrastructure is crucial for economic growth, global economic competitiveness, good education and for delivery of efficient government services. Furthermore transparency on issues such as pricing and good corporate governance are essential to any arrangement concerning the future a government owned broadband infrastructure provider. Whilst we believe that competition will ultimately be the biggest driver in bringing down the cost of connectivity for consumers it is our view that this can only happen within an appropriate policy and regulatory framework that takes into account local market conditions as well as the absence of competition in the ownership and access to infrastructure based competition.
It is our submission that the thrust of the deregulation path set out in the ECA is one that embraces competitivness of the market by disallowing any operator from signing or continuing to enforce agreements international or national that accord exclusive rights concerning critical facilities such the core infrastructure both for backbone and last mile purposes. It is our view that the Infraco Bill instead of perpetuating the legacy of exclusivity and monopoly in relation to provision of certain infrastructure based services it should rather duly address the following key focus areas:
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All services based operators (need to) have equal access to the information about available capacity in relation to
Infraco.
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Tariff conditions must be transparent and non-discriminatory to all services based operators.
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Restoration and maintenance services need to be ensured/provided through a Service Level Agreement.
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Furthermore there needs to be close monitoring and scrutinizing (of) the situation of possible anti-competitive behavior in order to ascertain that certain operators do not receive preferential treatment in relation to pricing and capacity provisioning.
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It therefore our contention that whilst investments in the network have been significant, with the network being fully digitised and the corporate customer base grown and service quality dramatically improved, the number of fixed subscribers has declined over the last two years, with over 2 million disconnections over the last five years, largely due to affordability. The preferred sequencing of privatisation followed by liberalization has created a private monopoly with the market dominance that severely inhibits effective competition. The statutory protection of Telkom’s revenues through the requirement that those that it competes with downstream acquire their facilities from the incumbent has resulted in a slew of anti-competitive complaints to both ICASA and the Competition Commission.
Failure to introduce an effective competitive regulatory regime in a private monopoly environment has had a particularly negative impact on the VANS and ISP segments of the market, where Telkom’s rights and behavior have had a chilling effect on the market’s activity. This has been one of the major sources of tension in the sector and the source of numerous disputes between the VANS, who rightfully claim that Telkom is leveraging its market power with anticompetitive effect in the VANS market.
At the heart of the regulatory challenge facing South Africa is the market design. Structured around a vertically integrated national company, rival firms, with whom the integrated company competes downstream, are required to acquire the incumbent’s non-competitive facilities in order to operate. This structure creates anti-competitive incentives for the incumbent to deny access to its network to rival firms, whether through delays (IS has more than a thousand outstanding circuits ordered from Telkom) or pricing strategies. The effect of this market design is evident in the negative impact the withholding of bandwidth and the high costs of facilities, despite a tariff regime, have had on the VANS and ISP market segments.
The ECA together with the prospect of the Infraco Bill presents the legislature and the country with a strategic opportunity to overhaul the market design particularly in the infrastructure layer. It is at this level where the introduction of competition which can drive down the cost of communication and doing business in the country is most necessary. It is our view that the country needs to look no further than the fixed line and cellular market to draw lessons on the effect of a duopoly and now triopoly in the market. It is only through allowing Infranco as a Wholesale Operator with open access as an underlying principle to its approach on the market that the country can be able to drive down prices to more competitive global levels resulting in increased usage and penetration. It is through introduction of effective infrastructure based competition that South Africa will start to build the information infrastructure necessary for effective participation in the global economy. International precedents indicate that open access principle can achieve the following in the market:
The ECA in our view was intended by the legislature to introduce major structural changes designed to enable the growth of the sector and to remove some of the most inhibiting policy and legal constraints that have hindered ICT growth in this country. With the exclusivity period over and the country now faced with the prospect of a duopoly between Telkom and
Neotel the rationale for control of core regulatory and licensing functions no longer exists. The regulatory bottleneck this has created in the preparation of a fair competitive environment for the sector could therefore be justifiably removed. This would have the added benefit of immediately relieving ICASA (and indeed the Competition Commission and the courts) from expending any more resources on the unproductive disputes that have plagued the industry since the beginning of the managed liberalization process, and clear the slate for anticipated convergence policy implementation.
The current framework has left the incumbent operators with residual market power and the prevailing access regime has not resulted in the development of alternative networks or an effective infrastructure based competition in the market. This has significant implications for the development of a network economy, where the opportunity to provide critical new services such as broadband has not been effectively utilised by the incumbents who have been slow to provide such services or have sought to charge exorbitant prices thus reducing the penetration rate of such services. SA therefore needs to induce investment through creation of more rather than less infrastructure based competition which creates opportunity for investment in the critical network expansion required by the country to meet the needs of the network economy.
It is our submission that the effect of strategically positioning Infraco as a wholesale provider of infrastructure based services will serve to increase the number of players that can compete at the services level of the market an approach that can have a downward pressure on the cost of providing communication services.
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3. Conclusion
Despite the continued overall growth of the telecommunications sector in SA, the full potential of ICT to contribute to the growth and development of the country is not being realized. Without effective competition both at the infrastructure and services level of the market SA communications sector and indeed the economy will not be able to perform to its true potential. Until the promulgation of the ECA in 2006 all network licenses and associated services were restricted to licensed incumbents. Telkom continues to have defacto monopoly over the PSTN market and Vodacom and MTN remain dominant in the mobile market leaving Cell C very little room to maneuver. The outcome of this very uncompetitive market structure with entrenched vertically integrated incumbents, have been limited access to services and high prices associated with monopoly rents.
The Policies proposed by the Minister of Communications presents ICASA and the sector with an opportunity to redress these historical legacies and adjust the prevailing inhibiting market structure. To simply re-create another form of a monopoly will do nothing to advance the growth of this sector and will at best serve to increase the strangle hold that incumbents have on the market. To simply liberalise the services layer of the market without ensuring that there exists effective competition at the infrastructure layer of the market and that international bandwidth prices are competitive will not address the issue of low penetration of services and the high costs associated with such services.
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