PUBLIC HEARINGS ON THE
BROADBAND INFRACO BILL,
2007
Portfolio Committee on
Public Enterprises,
Cape Town
22 August 2007
1
Table of Contents
• Public Comments
• Review: Basis for InfraCo Intervention
• Infraco Licensing
• Neotel Relationship
• Sentech v Infraco
• Conclusion
2
Public Comments
Comments were received from:
1. City of Cape Town;
2. Major Operators (Vodacom, Cell C, MTN, Telkom,
Sentech and Neotel);
3. Public Entities (Universal Service and Access Agency of
South Africa (“USAASA”), Eskom Holdings);
4. Value Added Network Services Providers (Internet
Solutions, iburst); and
5. Regulatory Agencies (ICASA and Competition
Commission).
•
The comments largely express support for the concept of
Infraco
3
Public Comments
Parliament requested the Department to respond to the following comments from
the public:
Licensing
•Infraco should be licensed
•The Bill should include a deemed
licence provision
•Infraco should be licensed in
terms of the ECA
USAASA
Competition Commission
Cell C
ICASA
Neotel
Sentech
MTN
Iburst
Telkom Limited
Vodacom
Internet Solutions
Deemed Authority:
-Strategic government intervention
-Legislature’s constitutional power to legislate even in
regulated environment
-ICASA has delegated power
-ICASA’s powers to determine licence conditions are not
excluded
-Precedent of deeming licences in the communications
sector eg Eskom, Transnet, SANDF, Sentech
-ECA amendment - policy
Sentech v Infraco
•Infraco should not infringe on
Sentech broadband services
•Limit Infraco network to fibre optic
and specific geographic areas;
•Merge Infraco and Sentech;
•Amend Schedule 2 of PFMA
through Infraco Bill to list Sentech
Sentech
•Different Areas of Intervention – wireless v fibre optic, Tier 2
v Tiers 1&3
•Broadcasting v telecommunications
•Short term (broadcasting digitisation and 2010) v medium
and long term (projects of national interest) focus
4
Public Comments
Continued…
Neotel Relationship
•Infraco should be able to grant
open non-discriminatory
access to its network
Cell C
Telkom Media
Telkom Limited
Neotel
Vodacom
MTN
Internet Solutions
iburst
Subject to existing South African laws
Regulated by ECA
Purpose of Bill is to establish Infraco as SOE
Commercial marketing arrangement that will ensure
transparent pricing
5
Public Comments
• Specific Comments on the content of the Bill
Main Object of Infraco
•City of Cape Town
•Eskom Holdings
•Amend the main object of Infraco to include the following:
–provision of optic fibre infrastructure capable of
supporting high bandwidth electronic communications
networks on a non-discriminatory, open-access basis
•Regulated by ECA
•Backbone infrastructure
–Provide affordable broadband telecommunication
services
Conflict of Laws
•Neotel
•In the event of conflict between Bill, ECA, Companies Act
and Competition Act, Bill should prevail
•Establishment Bill
Cosmetic and stylistic changes
•Eskom
•Replace “acquire” with “purchase”
•Stylistic changes, not
adopted
Definitions
•Telkom, Cell C
•Include definition of electronic communication services and
the broadband services Infraco will provide
•Backbone infrastructure
only
Status of Infraco under PFMA
•Sentech
•List Sentech in Schedule 2 of PFMA
•Establishment Bill for
Infraco
•PFMA amendment is a
consequential amendment
6
Review:
Basis for InfraCo Intervention
7
DPE Study
•
South Africa significantly lags behind its international counterparts in
terms of ICT penetration and the rate of new technology adoption.
•
Broadband penetration relative to international benchmarks is virtually
non-existent and significantly more expensive, which is critical for an
advanced manufacturing economy (eg projects of national importance).
•
Broadband costs in South Africa are prohibitively high, making it a
luxury, and not a public good (basic infrastructure).
•
Investigations into the high broadband costs revealed that the largest
connectivity costs are attributable to national backbone connectivity
and international connectivity.
•
The logical conclusion was to intervene to address these national
backbone and international connectivity cost structures.
8
Current Status
1
2
3
National Long Distance = Telkom Monopoly, unlikely to change Government needs
to intervene
for a number of years to come even with the ECA
here
Metro & Access Networks = Increased Competition likely here under the
ECA because lots of players will make local investments.
NO NEED FOR GOVERNMENT TO INTERVENE, so NO INFRACO here
2
International Marine Cable Connectivity = SAT-3 monopoly,
and here
nothing likely to change here soon.
And NOT here,
what Sentech has been
trying to do for a number of
years
what InfraCo proposes to 3
do
1
3
9
Licensing the SNO won’t help
History in numerous other countries have proven
The Kinked Demand Curve Model of Oligopoly
Monopolistic
Duopolistic*
Price, Cost
Oligopolistic
0
Output Level (Q)
With Telkom as the ONLY other infrastructure
competitor there is NO incentive for a second
commercial operator to set prices significantly below
10
Telkom’s Source: Douglas [Harvard], Accenture
Infraco Long Distance Pricing
Relative to 2006 Telkom STM-1 Benchmark
120%
100%
InfraCo intends to
deliver a 95%
discount off
current NLD rates
within 5 years
80%
60%
40%
35%
26%
18%
20%
12%
8%
5%
5%
5%
5%
2011/12
2012/13
2013/14
2014/15
0%
2006/07
2007/08
2008/09
2009/10
2010/11
InfraCo intends to price access to infrastructure by
InfraCo STM-1 Pricing as % of Benchmark
Telkom 2006 STM-1 Benchmark
maintaining a utility level IRR of 16%.
The MORE bandwidth the industry uses,
the CHEAPER it will get.
11
Licensing
12
Support for expedited licensing process
•
Competition Commission:
–
–
–
–
–
•
Internet Solutions
–
•
Deemed licence
Urgent intervention required to ensure universal rollout of national fibre backbone
Neotel
–
–
•
“License Infraco and embrace early opportunity to create competition in the market”, Public Hearings,
2 August 2007
USAASA
–
–
•
acknowledged the Infraco rationale
acknowledged the Telkom monopoly
presented evidence of market power abuse as a result of the monopoly
confirmed that it would not accept a merger filing application
tabled no obstacles for the creation and empowering of Infraco to operate its infrastructure
Deemed licence may be justified under the Constitution,
Deemed licence will enable ICASA to retain higher degree of regulatory control over Infraco through
the licence conditions
DOC
–
–
–
ICASA has delegated authority and no power to intervene, only Legislature has authority and
discretion to intervene
Precedent of deemed licences (Sentech, Eskom, Transnet, grandfathered/converted licences)
ECA amendment, but not specific to Infraco
Therefore, parties acknowledged that Infraco increases competition 13
in the sector and introduces investment efficiency
Everyone wants InfraCo Licensed
• Telkom, Sentech & Mobile Operators want InfraCo licensed
through the normal ICASA licensing process – the challenge is
that this could be a long process.
• Short Answer:
– All these entities are both in infrastructure and services and
InfraCo forces a change in their business model and
reduces the competitive value of their investments;
– Guaranteed to tie InfraCo up in a licensing process for an
indeterminate period;
– With InfraCo tied up, the status quo is maintained and thus
the competitiveness of this sector is not enhanced.
– Entrenches the status quo and the exclusive commercial
relationship with Neotel.
14
Everyone wants Infraco Licensed
• ICASA also wants Infraco licensed through the standard
ICASA licensing process.
• Short Answer:
– ICASA has delegated authority and can only function within the
express and prescribed authority, otherwise subject to review;
– As administrator, ICASA favours staying within ECA framework;
– However, ICASA cannot legislate and determine whether or not
legislation should be amended. Only the Legislature (Parliament) can
do that;
– Proposal by DOC is to amend the ECA to allow the granting of
deemed licenses for majority state entities when the intervention is
strategic
– This would then enable ICASA to grant the deemed license under this
condition
15
Everyone wants Infraco Licensed
• A deemed authority to own and operate its infrastructure is
the only logical way to ensure an expedited licensing of
Infraco:
– Infraco is a strategic Government intervention;
– A deemed authority allows Infraco to contribute immediately to
furthering national priorities while allowing ICASA to exercise its
delegated authority;
– Statutory precedents of deemed licences (eg Sentech, Eskom and
Transnet)
– From that point onwards ICASA can issue the licence terms and
conditions;
– The Legislature has the constitutional power to legislate on any
matter that does not violate the Bill of Rights;
– By creating the ECA regulatory framework, the Legislature has not
delegated its legislative power to ICASA.
– However, it has delegated the administration of the ECA regulatory
processes to ICASA.
16
Sentech
17
Sentech
• History of Sentech – spun out of SABC and broadcasting signal
distributor;
• Sentech “arguably the most comprehensively licensed
telecommunications entity in South Africa” – ICASA, Infraco
Public Hearings, 2 August 2007
• DPE process was rigorous in that it investigated the causes of
high broadband pricing in SA - Strong evidence for this cause
points to Long Distance and International Connectivity as the
major issues, NOT Tier 2!
• In broadband Sentech focusses on wireless access networks,
the Tier 2 application services
• Areas currently covered for MyWireless Broadband Service are
in Metropolitan areas
18
Sentech
–
–
–
GAUTENG
Johannesburg:
Current:
Bedfordview, Brixton, Carlton City
Centre, Cresta, Fourways, Halfway
Gardens (Allandale Road), Helderkruin,
Honeydew, Hurleyvale, Hyde Park,
Horizon View, Johannesburg Airport
Killarney, Linksfield, Marlboro, Northcliff,
Randburg, Rosebank, Sandton,
Strydompark ,Woodmead, Midrand,
Aasvoelkop, Morningside, Wendywood,
Honey Hills, Kempton Park
Pretoria:
Current:
Centurion Techno Park, Elardus Park,
Hennopspark, Kilnerpark, La Montagne,
Lukasrand, Menlopark , Pretoria Central,
Rooihuiskraal, Clubview, Sunnyside,
Brooklyn, Waterkloof Ridge
–
–
KWAZULU NATAL
Durban:
Current:
Durban North, La Lucia, Umgeni,
Umgeni Mouth, The Bluff, Sunningdale,
Umhlanga, Bay of Plenty, Inverness,
Rockford, Umhlanga rocks, Umhlanga
Ridge, Durban Central
WESTERN CAPE
Cape Town:
Current :
Blouberg, Cape Town Central,
Durbanville, Goodwood, Loevenstein,
Milnerton, Newlands, Panorama, Parow
North, Salt River, Tygerberg, Wynberg.
MPUMALANGA
Nelspruit
19
Sentech
– The Sentech programme in its shareholder department’s budget
expressly states that the programme transfers funds to Sentech to
support provision of broadcasting signal distribution
– Additional allocations to Sentech in 2007/08, 2008/09 and 2009/10
are to accelerate the rehabilitation and digitisation of broadcasting
signal distribution infrastructure.
– Over the medium term, Sentech will focus on the digitisation of its
signal infrastructure and the roll-out of the ICT infrastructure
required for 2010 FIFA World Cup
– Sentech’s 2006 Annual Report shows that approx. 75% of
Sentech’s expenditure is on its broadcasting network [R497m
(75%), while only R172m (25%) is in multimedia and telecomm] –
indicates business focus of Sentech
20
Sentech
– UK took approx. 10 years to digitise analogue broadcasting
infrastructure, South Africa is trying to do that in 3 years. No
single enterprise can run such huge multiple interventions
(digitisation and broadband penetration).
– Clear that Sentech’s focus will be on digitisation in the medium
term because it is a huge undertaking on its own.
– Merging Sentech and Infraco is not an option
– Given budget allocation and priorities, Sentech is fundamentally a
broadcasting signal distribution company.
21
Neotel Exclusivity
22
Neotel Exclusivity
• Commercial agreement between DPE and Neotel, which will be
regulated and be compliant to existing South Africa laws requiring
access on reasonable requests;
• To ensure that low costs are passed down to subscribers, the
agreement will require Neotel to provide transparent pricing of
Infraco’s infrastructure access charges to Neotel;
• If InfraCo was licensed, exclusivity would be subject to the provisions
of the ECA and the Competition Act;
• Practically, however, a default exclusivity of at least 1-2 years would
exist anyway by virtue of;
– The licensing process with ICASA will take some time – in the meantime
InfraCo is a subcontractor under the Neotel license;
– InfraCo currently only has an optical transmission layer – Neotel’s IP layer
is used to deliver service to customers
– InfraCo would take at least 1-2 years to build its own IP layer in order to
be able to provide service to other customers
23
Conclusion
•
Infraco is a strategic Government intervention required immediately to
introduce competition in the ICT services market by providing catalytic
Broadband capacity at affortable prices
•
Infraco will provide only backbone national long distance fibre and the
undersea cable
•
All parties submitting comments to the Bill agree that Infraco should be
licensed
•
To expedite the intervention and align South Africa with other advanced
manufacturing economies, Infraco should be licensed immediately
through a deemed licence clause in the Bill, which is a lawful and
constitutional exercise of Parliament’s legislative authority and
discretion;
24
Conclusion
• Sentech is a broadcasting signal distributor and its business focus
in the medium term is on upgrading its aging broadcasting
infrastructure and digitalisation
• As a commercial enterprise operating in a dynamic fast-paced
industry, Infraco should be classified as a Schedule 2 major public
entity
• The relationship between Infraco and Neotel is subject to South
African laws (ECA and Competition Act). Failure to grant Infraco a
licence will entrench the status quo
• Preferred options:
– Deemed licence in current Bill;
– ECA amendment
25
END
Questions?
26