Paul Kruger, tralac Researcher, discusses the development of the telecommunications sector in South Africa

Telecommunications is to trade in services what transport is to trade in goods. In the last decade, advances in technology have spurred the emergence of trade in cross-border services. The fragmentation of production chains has also created opportunities for specialisation in different locations and the outsourcing of various services, something which holds great potential in particular for developing countries. It seems unlikely that countries will be able to exploit the full potential of services trade without access to quality and cost-effective telecommunications services. On the domestic front, telecommunications have become embedded in all spheres of the economy, leading to greater productivity and innovation. Telecommunications have become key inputs in all industries, especially for companies wishing to compete in a regional or international setting. The development of a robust telecommunications sector to enhance the tradability of goods and services must therefore be an integral part of every economic development strategy.

Telecommunications play such a central role in the economy, that Telkom, the fixed line provider in South Africa is even seen as a ‘strategic national asset’ by government. Some would strongly disagree with such a statement, arguing that Telkom should rather be seen as a national liability, which has stifled South Africa’s growth during the formative years of the telecommunications revolution. Last month, the Competition Tribunal imposed a penalty of R449 million on Telkom for abuse of dominance in the South African telecommunications market between 1999 – 2004, for engaging in practices that made its downstream rivals less competitive. The Tribunal found that “Telkom impeded the growth of its competitors and retarded innovation in the market place,” and further added that “Telkom bullied its downstream competitors into line”. Domestically, Telkom’s business has been struggling due to the volatility of fixed line usage in South Africa and its largely unsuccessful venture into the mobile phone business through its 8ta subsidiary. The company’s expansion into Africa has been sluggish, given the setback it suffered in Nigeria after investing in Multi-Links.  This has led to the share price of Telkom dropping by more than 50 percent in the last 12 months.

It could be argued that Telkom is ‘semi-privatised’. It is fully corporatised and listed on the Johannesburg Stock Exchange (JSE), but the government still holds the majority stake in the company. Government has a direct 39.8 percent shareholding in Telkom, with the state owned investment arm, Public Investment Corporation owning another 10.9 percent. The effect of such a semi-privatised structure was illustrated during the negotiations for the proposed sale of a 20 percent stake in Telkom to South Korean telecommunications firm KT Corp. After lengthy discussions, the deal was rejected by Cabinet which had the final say in the matter due to the majority shareholding of the government. The Department of Communications issued a statement, pointing out that Telkom was a key and strategic asset in the roll-out of telecommunications infrastructure, and in order to get Telkom back on the road to deliver ICT services to all South Africans, new options must be considered to implement an urgent turn-around strategy. It is unlikely that one of the options will be to fully privatise Telkom and use the proceeds to achieve the universal access objectives.

It has been reported that, rather than further liberalisation, one of the options currently under consideration is the re-nationalisation of Telkom. In light of Telkom’s already cosy relationship with government, such a move could have serious implications across the economy. The Competition Tribunal, in considering mitigating circumstances in the Telkom case, partly blamed the Minister of Communications and the regulator for the actions of the telecommunications operator. It also emphasised the conflict of interest for the Minister of Communications, as the Department of Communications was seen to be responsible for the development and liberalisation of the entire telecommunications sector, while at the same time representing the government as Telkom’s shareholder. Now it seems the Minister is again playing a central role in devising the strategic future of Telkom. The Tribunal made a telling observation during its decision: “The fact that Telkom has been reported to be losing data revenue is quite alarming in a market in which it still has the largest fixed line network”.

After a long period of telecommunications nationalisation (1880s – 1970s), many countries started to gradually liberalise their telecommunications markets from the early 1980s. Even across sub-Saharan Africa, most countries have been going through a process of telecommunications liberalisation, and as a result, competition has developed rapidly. This has led to improved sector performance in terms of subscriber numbers, prices and coverage. A recent World Bank study did a spatial analysis comparing the cost of network expansion and the potential revenues of such expansion. The analysis estimates that 92 percent of the population in sub-Saharan Africa is living in areas that are potentially commercially viable. This percentage is likely to be even higher in South Africa. There are other ways to achieve universal access objectives, and hopefully some more innovative approaches than re-nationalisation will be offered by the Minister of Communications.

Where would the money come from to fund the re-nationalisation scheme? At the current share price of R16 it would cost the government just shy of R4 billion to buy back the 47.3 percent shares floated on the JSE. Then it would need even more to roll-out its universal access plans. At the end of the 2011/2012 financial year Telkom reported failing revenues in voice and data operations, while the profit after tax for the year declined by 93 percent to R179 million. Telkom will need to be far more efficient to be instrumental in realising the government’s universal access goals. Telkom is currently one of the most expensive broadband providers in the country despite owning the fixed line infrastructure including the local loop. Telkom is simply not competitive in the current market. It is unlikely to change under re-nationalisation, unless government can ‘protect’ Telkom’s market like it did between 1999 – 2004.

An alternative solution is being proposed by the National Planning Commission in its revised National Development Plan. The report describes most state interventions in the ICT sector as ‘disappointing’ and finds it necessary to address the conflict of interest between the government’s role as competitive player and policy maker. It supports free market competition and effective regulation as a means to deliver access to telecommunications. Universal access may prove ineffective if it is not provided at affordable prices. Availability is only part of the universal access equation, as the cost of the access is already pricing many people out of the market. Affordability can only be addressed through more effective competition and regulation. The idea of the National Planning Commission is to separate Telkom into two businesses: one managing the backbone infrastructure and the other focussing on retail operations. Telkom is currently the only wholesale provider of digital subscriber line (DSL) services to the internet services providers (ISPs), of which its ISP, Telkom-Internet is one. If Telkom is split, it would lead to the further liberalisation of the market as such a model will remove any conflict of interest between the buyer and seller of DSL services.

One decision could potentially advance South Africa’s competitiveness. Which one will it be?

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