Confusing Clarity
On the surface, the news is good. The government has stated its clear intention to review telecommunications and broadcasting policy to facilitate competition, promote convergence of both infrastructure technologies and services, and strengthen the Independent Communications Authority of South Africa (Icasa), which regulates the industry.However, it may have unwittingly introduced a new level of complexity and confusion in the process.The Convergence Bill, which was promised to be ready three weeks after the colloquium held in mid-July, seems set for the usual hurry-up-and-wait treatment. Some sources believe it will be subject to a month`s public review before being tabled in Parliament, and none expect the current session of Parliament to get around to it.“I expect the Bill will only go to Parliament next year, so we won`t see a new dispensation before 2005,” says Anthony Brooks, head of regulatory affairs at the Internet Service Providers` Association (ISPA).Financial analysts declined to be quoted for this article, saying that the situation is too fluid to make any real assessments of how the proposed policy review will affect companies in the telecommunications or broadcasting space.“I want clarity, and at the moment I don`t have that,” comments Bhawani Shankar, Gartner`s telecommunications analyst. He refers primarily to the level of state involvement in infrastructure, pointing to the state`s continued ownership of shares in Telkom, the long-delayed second network operator (SNO), as well as signal distributor Sentech and an indirect share in cellular operator Vodacom.Karabo Motlana, head of regulatory affairs at mobile operator Cell C, likewise sounds a note of caution. “The industry is highly sensitive to instability. Look at the SNO process, for example. It`s gone to a second round of bidding, simply because we couldn`t get a viable competitor the first time around. Clearly, the SNO will need foreign capital commitment and this will need to continue in order to sustain the SNO: in an environment of policy instability, do you think we will see that money?”Fears that convergence policy will introduce more delays and complexity into an already messy environment are justified, in Motlana`s opinion. “The process calls for rigour in planning, process and administration and proper structure. We need to tread carefully and slowly, as our concern is that if the process is hurried, it will only end up causing the entire industry even more problems and create more complexity.”Like other incumbents, the big daddy of South African telecommunications, newly-listed Telkom, welcomes a convergence policy, but with reservations. “The question is the period of transition,” says Nkenke Kekana, the ex-parliamentarian who recently became Telkom`s executive in charge of regulatory affairs.ISPA`s Brooks, by contrast, is much more optimistic. “We`ll get more clarity,” he says, “because of a change in the government`s thinking and its attitude towards policy. It`s no longer one of protecting Telkom, but of providing an effective environment for competition.”Investors, he believes, feel the same. “They would have looked at the colloquium with a huge sigh of relief,” he says. “It`s about time. It probably will attract smaller or medium-sized companies rather than large operators, but then, South Africa isn`t attracting the large operators anyway.”An investment analyst, however, notes that it`s early days for foreign investors. “I don`t think too many have gone into convergence policy in great detail and they`re not sure what the outcome will be. They probably would expect a certain consistency in the environment for a certain length of time, especially since the Telkom IPO. If you look at the regulatory history, there have been a few areas that could destroy a lot of value, and they`ve been negotiated out.”The most important policy changes the Department of Communications speaks of can rightly be described as a paradigm shift. Rejigging the marketThe idea is to change the market structure from one in which operators hold vertically-integrated, technology-specific licences – as Telkom and the cellular operators do today – to one in which they will obtain a set of horizontal licences. This will enable infrastructure providers to operate without limitations on which technologies they can use, and allow services providers to select the infrastructure providers most appropriate to their needs.Gartner`s Shankar believes there are strong arguments in favour of such a model, although he hasn`t seen examples where that kind of structural change has been contemplated and implemented by a government – despite the fact that many administrations and regulatory bodies talk about it.“I see a spontaneous move in many markets, however. In principle, I`m in favour of such a structural separation. If you allow markets to take their own course, this will happen naturally, since infrastructure and services are entirely different animals,” he explains.“Infrastructure operators that will make a variety of products available to a variety of businesses are capital intensive, show slow return on investment, and need stability. The services businesses that exist at its periphery, however, need to be very flexible, understand the changing needs of customers, and not require a huge amount of capital.”He believes there may be as few as one or two infrastructure businesses and a multitude of services businesses. “Compare it to oil and gas: 75 percent of the production is handled by a handful of companies, but the distribution is done by a much wider field of competitors.”He adds that companies are judged on financial metrics that may benefit from such a separation. “One of the aspects of the downturn in telecommunications is that we have some financial analysts that don`t really understand the fundamental shifts in the industry, and who still expect 20 to 30 percent gross margins – which is a services model, not an infrastructure model. If we actually move to a structure where you recognise that you`re dealing with different entities, you do the markets as well as the players good.”Horizontal licensing is certainly geared towards more innovation, notes Brooks. “Over the years, we have had many queries about the provision of voice over Internet protocol (IP), for example. I expect the new framework to lift restrictions such as this. The worst-case scenario is to get specific licences for what is now restricted, as is the case in Malaysia, where voice over IP is licensed separately from voice, for example. This would mean it`s not as technology neutral as the government would like it to be. Technology neutrality is a trickier task than it sounds.”Mike van den Bergh, MD of Gateway Communications, a partner in one of the consortia bidding for the SNO licence, notes that previous telecommunications legislation, though it didn`t always describe it correctly, actually envisaged a more horizontal structure.“A vertical licensing model is not necessarily required, and in fact, it`s quite often got in the way,” he says. To achieve the structure the convergence policy seems to be aiming at, he says, “you would have to ensure that where operators currently have a vertical licence, it would be replaced by a set of horizontal licences by which they lose none of their original rights. In fact, they may well gain some rights, which is a point that is sometimes forgotten. It would lead, in my opinion, to a far more efficient model, where we would have many alternative channels to market for an operator`s services.”He believes regulatory changes, like technology changes, cannot easily be predicted. “I think it`s the most flexible operators, the ones most in tune with the market, and the ones not sitting on massive legacy systems such as Telkom, that can most easily adapt.”Cell C`s Motlana is in two minds about this view. While he believes it will be positive for incumbents such as Telkom, he`s concerned about stability in the sector and protecting Cell C`s multi-billion rand investment.“Whatever else might be said, we feel that mobile operators will still compete against other mobile operators – at least in the short term – and fixed line operators against fixed line (whenever the SNO is licensed). We would like the framework for the market to continue in those terms. What we want is a more coherent and more logical licensing structure. Pity it`s being collapsed into vertical and horizontal descriptions, which may actually cloud the issue a bit, but the key factor is that of technology neutrality – using any technology to provide a service you are licensed to provide.” Competition and its drawbacksContradicting Van den Bergh`s optimistic outlook for the SNO are Gartner`s analysts. Shankar says that if he were the SNO, he`d be very worried by the convergence process. “The process of licensing isn`t even complete when the regulatory environment changes…” Colleague Neil Rickard likewise says, “It would be nice to see something finished before starting something new.”When asked whether the SNO might have grounds to challenge proposed policy or legislative changes, because they run counter to the conditions under which it was invited to bid for its licence, Shankar is equivocal. “If I were the SNO, I`d be thinking along those lines. Whether that`s feasible I don`t know. Obviously, they don`t want to enter the market crying foul before they`ve even started operating, but they`d have legitimate concerns.”Brooks agrees: “It would be nice for the SNO to actually exist before a new licensing regime is imposed. But on the other hand,” he quips, “the SNO can`t be worse off than it is now: unlicensed and non-operational.”He also allays fears that Telkom may be threatened by the proposed changes. “In other jurisdictions, competition is good for incumbents – and Telkom is aware of that,” he says, sharing Motlana`s view that Telkom is sufficiently well run, capitalised and aggressive in protecting its rights for the impact to be negative.Telkom itself, surprisingly for an incumbent notorious for its obstructionism and foot-dragging, seems not too perturbed either. Kekana observes that licences that were issued should continue under the convergence framework, although he doesn`t indicate whether re-applying for the same rights under a new dispensation – as happened in 1996 – would be deemed acceptable.“As Telkom, we see convergence providing us with opportunities at all levels – network, applications and content,” he says. “What we`re expecting is that all players will enjoy the rights they have. We don`t want to maintain technology restrictions, but we don`t favour a big bang. There`s a Sotho saying: it`s better to walk than to run. Managed liberalisation is what guides policy, and we would expect this to be maintained moving forward.” Cut the tiesA recurring bone of contention in any policy discussion is the ability of the regulator, Icasa (which now incorporates both telecommunications and broadcasting responsibilities), to perform its duty.Several problems are regularly noted, one of which is that Icasa should not report to the office of the Minister of Communications at all, so it can act independently without, as Brooks phrases it, having “government standing behind Telkom glaring at Icasa”.“Contrary to other jurisdictions, Icasa has shared regulatory responsibility with the ministry,” explains Icasa CEO Nkateko “Snakes” Nyoka to a Gartner conference hall surprisingly full of corporate end-users. “There`s not anything inherently bad about this: Icasa can propose ideal regulatory guidelines but they have to comport with the political vision.”Alison Gillwald, director of the Link Centre at Wits University`s Graduate School of Public and Development Management, notes a more commonly cited problem, the creation in South Africa of a very resource-intensive regulatory framework. She believes that were the minister to exercise the right she has under current legislation to lift several restrictions currently in place – such as the prohibition on voice over IP – it would clear a number of regulatory and competition issues off the table.“Many of the decisions are out of the regulator`s hands; they need to be directed at policy-maker level,” she says.Says Van den Bergh: “A classic example is the VANS licence scenario. Do you know we are still running on either deemed licences in terms of the [Telecommunications Act of] 1996 for those who had licenses prior to that, or temporary or interim licences? Yet 1996 legislation required new licence structures to be in place within six months. Satra [Icasa`s telecommunications regulating predecessor] had two or three goes at it. Icasa had quite a competent go at it before proceeding with the 2001 Amendment Act. Now it`s been awaiting approval for over two years. So that kind of thing is a problem and I just think that it burdens the minister with things which are not necessarily of a nature which require ministerial approval.”Nyoka agrees with this view, saying, “I share Alison [Gillwald]`s concerns that Icasa is resource-hungry – not necessarily in rands and cents but in terms of skills and the power vested in the regulator.”Although the attitude of government towards policy has changed, as Brooks notes, he adds that, “The actual legal framework needs to be more supportive of Icasa – less vague, and less open to interpretation, which is what operators such as Telkom can use to keep challenging Icasa`s rulings.”Kekana agrees that Icasa should be better resourced. He observes that there has been a lot of staff poaching and a high personnel turnover at the regulator. “It needs the ability to stablise the market because of sound abilities, technical know-how, open and fair administrative process, and transparency. If administrative justice is done, and is seen to be done, there will be fewer court battles, because Icasa decisions are understood,” he says.“On the positive side, Icasa [after the merger of the telecoms and broadcasting regulators that preceded it] was thrown in the deep end, and it swam to shore.”Opinions on funding Icasa are divided, with some preferring Icasa to be funded directly from licence and spectrum revenues, while others believe any method will do, as long as it is sufficient. What nobody disputes is that it does not now have the wherewithal to attract and retain the skills and administrative capacity that it needs to be effective. Are you ready?Bhawani Shankar, Gartner`s analyst, presented a comparison with international experience, and some advice for the clients attending its Symposium/ITXpo in Cape Town in August.“I was here a year ago,” he recalls, “and in advising clients, not much has changed. But policy has changed.”End-user companies should rise above local, tactical, day-to-day concerns to obtain a strategic view, Shankar believes.Some of the key conclusions the research house has reached that should inform company planning are that functional and effective competition is unlikely until the second half of 2004 and, likewise, user expectations of both higher quality service and lower prices are unlikely to be met by this time. Furthermore, the risk of moving critical services and applications onto a competitor`s network will remain high over the same period.Policy choices the government makes will have a profound impact on the sustainability of the telecommunications sector, believes Shankar. It can choose to derive once-off revenues in the form of licence fees, at the cost of a smaller, more restricted market, or it can fund universal service and earn tax over the longer term from a larger and more vibrantly competitive sector.This choice will have a dramatic impact on the quality and cost of services to corporate end-users. “Competition in other markets didn`t kill the dinosaurs, but made them more effective – lean and mean”, he says.Companies should plan carefully to gain the most benefit from liberalisation, Shankar adds. “Retrain buyers and buying practices. There will likely be consolidation after deregulation, so don`t sign long-term contracts without break-out clauses.”He also cautions that once a second operator is running, critical applications and services should be moved in phases and with adequate backup.And, finally, in the event of the process failing to deliver, companies might want to consider locating business activities in countries that have opened up the sector to competition and have established a strong and independent regulator.Ruefully, one high-profile participant in the proceedings (who`ll remain anonymous) muttered: “If Bhawani had advised government since 2000, they might have done things differently...” Exploited of the world uniteOne feature lacking in the South African market, according to Shankar, is business and consumer activism.“A major problem in this environment is I don`t see business and consumer as a strong lobbying power in the policy-making process. I see many bits of legislation that sound fine in theory but are difficult to implement,” he explains.“South Africa is probably unique in that some large businesses have found a way around a problem by becoming ‘companies in exile`. They spread their risk by listing elsewhere, aren`t dependent on local conditions, and are insulated from vagaries of local change. Unfortunately, small businesses can`t do that. And it would be incorrect to say that businesses don`t feel the urge to make that case to government.“Building bridges of trust is all part of growing up and coming of age. I`m sure these are short-term problems. For example, Dimension Data might punt call centre business, and if they say X number of jobs will come this way, make a good case to government, people will sit up and take notice.”While this view might seem, at first glance, misinformed, Brooks puts it in a clearer perspective: “Industry lobbying is alive and well, although it could be stronger and better funded. But the missing part is non-provider activism: business and consumer lobbying. That`s probably a broader South African problem, however. But it would be nice to get more active lobbying on, for example, very troubling aspects of interception legislation – not only by those who have to pay for the interception equipment, but by the consumers and businesses whose rights might be at risk.”“There is short-term disillusionment and disheartenment, but long-term noises are pretty hopeful,” says Shankar. “People expect things to happen quickly, but they won`t – no matter what an SNO tells you in a public hearing.”Kekana is, perhaps surprisingly, welcoming of many of the changes under consideration. “Convergence will benefit end-users because it will offer them a variety of services to choose from. We see opportunities for Telkom at all levels through convergence, especially in a technology-neutral environment.“Telkom is ready for competition,” he says, answering the question of how Telkom would respond if restrictions the minister can lift tomorrow are in fact lifted. “It has never been in a better position. Because of managed liberalisation – those policies were correct.”And business? Is it a case of further complexity, delay and confusion, or one of clarity and optimism?Van den Bergh has been consistently upbeat, believing that the convergence policy process will be good for users, which he represents via the Computer Users` Association of South Africa, value-added network operators, which he represents via the South African VANS Association, and operators, which he hopes to represent as a director of CommuniTel, a bidder for the 51 percent stake in the SNO. Delivering the vision“I`m quite encouraged and excited by the concept of convergence and just hope it follows through on its early promise and we`re able to deliver on what has been envisaged here. I think it`s the first true re-examination of telecoms policy since 1994. A lot of what 1994`s policy was about was protecting Telkom: it didn`t predict any of the major changes to the market.“It didn`t take note of how cellular would grow – even in terms of universal service we were only talking fixed line. It also didn`t envisage the growth of the Internet, issues such as IP, voice over IP, and so on.“It was such prescriptive legislation we haven`t really seen the market grow – it`s actually held it back, and I think if this action goes the way its being pushed it`ll be the best thing that can happen to the industry.”“It think it`s the opposite [of confusion],” concurs Brooks. “We`ve had a far clearer picture of where the government wants to go,” he says. “We`re in a better position than we`ve ever been before.”Kekana concludes: “We`re not threatened at all. Competition will show end-users the quality of service Telkom offers.” Indeed it will.With additional reporting by Rodney Weideman.
