Stimulating investment in network extension: the case of South Africa

Stimulating investment in network extension: the case of

South Africa

Alison [email protected]

World Dialogue on RegulationAsia Expert Forum

LIRNEasia, Sri Lanka, September 2004

mailto:[email protected]

2WDR Cairo May 2004

South Africa fact file

• 1994 Constitutional democracy – protects property rights, economic activity, statutory organisations, robust rule of law

• Country size 1,219,912 sq km with mixed terrain

• Population 42 million (Africa 850 million)• Urbanisation 50% unemloyment 35%• GDP $500billion, per capita income $10 500• Highest Gini Co-efficient in the world• Dual economy• ICT 8% of GDP

3WDR Cairo May 2004

•Africa 1% fixed line teledensity at turn of millennium

•Transfer of costs of network development to private sector

•Telecom reform model as investment strategy - Privatisation (30% Telkom – SBC, Telekom

Malaysia, IPO in 2003)- Liberalisation (Mobile, VANS, PTN, CPE)- autonomous regulation (SATRA > ICASA)- Universal access (Universal Service Fund and

Agency)•Targets to contribute to national objectives of

affordable access and network modernisation

Outcomes International lessons CausesStrategies

Developing country review

New developments

4WDR Cairo May 2004

05

101520253035404550

FDI Inflows 1988 - 1990 %

FDI Inflows 1998 - 2000 %

World FDI Flow (%)



New developments

5WDR Cairo May 2004

43%

27%

5%7%

18%

Telkom VodacomMTN Telkom Data ServicesNon-Telkom Data Services (VANS)

Telkom VodacomMTN Telkom Data ServicesNon-Telkom Data Services (VANS)

R2.9R3.9

R10.0

R15.4

R24.0R7.1

100%

R7.1

100%

1992 2001

Source: ITU World Telecommunications Indicators Database (2002), Telkom IPO Prospectus, 2002 MTN Annual Report, 2002 BMI-Techknowledge Communications Handbook

*Billions of Rands

Size of SA Telecom Sector*



New developments

6WDR Cairo May 2004

Telecommunication Investment per capita US$

Average Telecom service revenue vs. Average annual telecom investment per capita (US$) 1996 - 2002

0

100

200

300

400

Korea

(Rep. of)

Czech

Republic

Argentina Malay sia Chile South

Africa

Poland Mex ico Turkey Egy pt

Total telecommunication serv ice rev enue (US$) per capita

Annual telecommunication inv estment (US$) per capita

7WDR Cairo May 2004

Telecommunication Revenue per inhab. US$ 2002

Telecommunications service revenue (US$) per capita

0

100

200

300

400

500

1996 1997 1998 1999 2000 2001 2002

Korea (Rep. of) Czech Republic Malay siaChile South Africa PolandMex ico Turkey Egy ptArgentina

8WDR Cairo May 2004

Total telephone density

Total telephone density in South Africa 1997 - 2004

05

101520

2530354045

1997 1998 1999 2000 2001 2002 2003 2004

Total mobile subscribers per 100 inhabitants

Total fix ed-line telephone lines per 100 inhabitants



New developments

Sources: Residential monthly telephone rental: 1997 - 2001: ITU World Telecommunications Indicators Report 20032002 - 2004: Telkom Annual Reports Residential telephone connection charge: 1997 - 2001: ITU World Telecommunications Indicators Report 20032002 - 2004: Telkom Annual ReportsCost of 10 hours worth of calls: 1997 - 1999: ITU World Telecommunications Indicators Report 20032000 - 2004: Telkom Annual ReportsTotal fixed-line telephone lines per 1000 inhabitants: Telkom Annual Reports

South Africa: Telephone tariffs 1997 - 2004 (in Rand)

49.681.9

274.35

171.0

61.80

227.44

103.31 101.93

0306090

120150180210240270300

1997 1998 1999 2000 2001 2002 2003 2004

Residential monthly telephone rentalResidential telephone connection charge Cost of 10 hours w orth of calls per month (peak rate) Total fix ed-line telephone lines per 1000 inhabitants

Source: ITU World Telecommunications Indicators 2003

Residential lines as a percentage of total fixed lines 1996 - 2002CAGR

-4.00%-3.00%-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%

SouthAfrica

Argentina Chile CzechRepublic

Egypt Korea(Rep. of)

Malaysia Mexico Poland Turkey

% residential main lines

Note: For South Africa and Poland the data is only up to 2001. For Argentina, there are no stats after 1999

Source: ITU World Telecommunications Indicators 2003

Fixed, mobile and total telecommunications subscribers per 100 inhabitants CAGR 1996 - 2002

87.7%73.2%53.1% 69.5%

100.3%

45.7%

South

Africa

Argentina Chile Czech

Republic

Egy pt Korea

(Rep. of)

Malay sia Mex ico Poland Turkey0.000.050.100.150.200.250.30

Cellular mobile telephone subscribers per 100 inhabitants Total telephone subscribers per 100 inhabitants Main telephone lines per 100 inhabitants

Note: The RHS axis denotes subscribers per 100 inhabitants

* 2004 amount is an estimate based on average increase since 1997

Sources: % growth of total internet subscribers: The Goldstuck Report: Internet Access in South Africa 2004Fixed line cost:1997 - 2000: ITU World Indicators Report 20032000 - 2004: Telkom Annual Reports Average ISP costs: www.internet.org.za

South Africa: Average ISP costs vs. fixed line cost of 20 hours internet access

R 124 R 154 R 184R 252 R 252

R 396 R 446 R 455R 80 R 80

R 88R 90

R 94R 100

R 89

R 104

0

100

200

300

400

500

600

1997 1998 1999 2000 2001 2002 2003 2004

Av erage ISP costs (Rands)*Fix ed line - cost of 20 hours w orth of calls per month (peak rate) % grow th of total internet subscribers

13WDR Cairo May 2004

South Africa: Dialup subscribers

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1997 1998 1999 2000 2001 2002 2003 2004

Dialup subscribers

Source: World Wide Worx: The Goldstuck Report: Internet Access in South Africa 2004


• WTO compliance with SA commitments• 30% privatisation saw US$1.2 billion purchase price and US$10

billion in network investment.• Duopoly in mobile and competition in VANS• Focus on maximisation and protection of value of state assets • Managed liberalisation – structural conflict on interest, policy

vacillation, regulatory bottlenecks• IPO - US$500 million raised from 25% share• Share price $2.5 in 2003 to US$7 in 2004• Empowerment objectives – Ucingo – raised capital for equity• Mobile investment in network expansion – $5 billion• Second phase – SNO, Multimedia and International Gateway

Licence – parasatals• Under Serviced Area Licence – 10 of 30 licences processed, 7

granted – internal investment• Third phase – Convergence – legacies of protection, some just

lifted



New developments


Low

High

Regulatory stability

Cash extraction

Investment returns

Credit Support

Political stability

Competition

Credible sponsorGovernment relationships

Controlling shareholding

HighLow

Financial Institutions

Operators

Source: SATCC (2003) Policy and Regulatory Harmonisation in the SADC Region, PPIAF and World Bank



New developments


• Political and economic stability• Policy

- Focus on privatisation at expense of liberalisation of market and on optimisation of state assets and maximisation of privatised incumbents revenues.

• Market structure - vertically integrated incumbent who competes downstream

against competitors required to get non-competitive elements from them creating anti-competitive incentives

• Institutional arrangements - Creates highly resource intensive regulatory regime – regulator

constantly monitor anti-competitive behaviour of incumbent• Access regulation

- Tariff regulation- Interconnection- Resource allocation

• USA - Obligations and levies• Not achieved economic or social objectives - resulted in high

prices, ineffective roll out and chilling effect on competitive sectors, ISPs, VANS and drag on national economy with little regulatory relief



New developments


• Inefficient investment and network development• Reduced investment in fixed network development and SNO

unlikely to compensate for this.• Competition between three state operators unlikely to result

in effective competition and innovation• Limited competition in mobile greater investment

efficiencies and network utilisation• Longer-term public interest views of the strategic need for

investment in knowledge infrastructure overridden by shorter-term maximisation of value on licence fees and sector levies, monopoly profits, and high share prices - resulting from a lack of regulatory restraint of the incumbent combined with unsustainable social goals.

• Incumbent significant residual power and ineffectual access regime little success in creating innovative and competitive environment necessary for network economy



New developments


• Demand for communications services innovatively met through strategic policy and regulation of market forces

• Gaps in market can be cost effectively filled by enabling alternative operators to come into areas regarded as unprofitable by incumbents eg. Chile.

• Pre-paid mobile services show flexible access, billing and payment can bring low income subscribers onto networks and provide profitable business case for investors.

• Need to create more affordable service through improved market efficiency which can be driven by increased competition and new cost effective technologies.

• Effect of increasing competition and participation, increased calling opportunities, economies of scale in volumes of traffic and cost of equipment, push down prices stimulates demand

• Short terms focus on value of state assets at expense of sector development should shift to consideration of fiscal impact of licences

• Taxes paid by telecommunications licencees to the Treasury in the 2003 financial year amounting to over R2 billion (US$300million).

• Unrestricted liberalisation of market not likely to achieve competitive or development objectives and increases regulatory burden

Access strategy ConclusionsOutcomes International lessons CausesStrategies

Developing country

considerationsNew

developments


• Review timing and sequencing of liberalisation and effectiveness of regulation

• Remove structural conflicts of interest and artificial restrictions on market development

• Structural separation allow for development of retail market on back of wholesale market for interconnection

• Structural separation creates competitive incentives, easier to set tariffs for non-competitive essential facilities, due to separation of the component parts and accounts

• With tariff fee structure sufficiently above cost and no business unit to protect downstream, incentive to encourage access .

• Reduce regulatory burden and less resource intensive• Common to success stories integrated strategies for

development of human capital.



New developments


• SNO equity partner to break management control impasse

• Lifting of restrictions on VOIP, facilities self provisioning, resale result frenzy of service based competition with associated regulatory overload.

• Some self provisioning may drive down wholesale and retail prices and improved range of integrated business services.

• Competition should result in reduced retail prices with regulator commitment of firm Rate Review but Telkom tied up business market in long term contracts, SNO may compete on wholesale and high end prices (ADSL) but roaming on incumbent network

• Under Serviced Area Licensees undermined little support from state essentially franchisees with little new build out.

• Investment in rural backbone??



New developments


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Alison GillwaldLINK CENTRE

Research ICT Africa!LIRNE.net

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Stimulating investment in network extension: the case of South Africa