South Africa’s leap from information dirt road to super highway

On Thursday last week, Communications Minister, Ivy Matsepe-Casaburri, announced liberalisation measures unparalleled in South African telecommunications history. The decades-old telephone monopoly will end on February 1 next year with the removal of the restriction on Voice-Over-IP transmission. What this means to the layman is the removal of Telkom's legal monopoly on retail voice services and the introduction of unprecedented competition into the sector.

The news could not have come at a better time for South Africa. We were dropping down the league tables of Internet connectedness, and were losing high-paying call centre jobs to Eastern Europe and India. Businesses have all been aware that they are paying too much for telephone services (as much as six times more than European firms) and bandwidth was unavailable let alone affordable. It is impossible to put a number on the total cost of South Africa's delayed telecommunications development. A conservative estimate would place the cost at billions of rands, excluding the cost of losing the tens of thousands of jobs that never were.

The Minister deserves high praise for recognising the urgency of the situation and adopting the "big bang" approach, aimed at rectifying the situation as soon as possible. However, we must continue to assess the policy of "managed liberalisation", which we were told was the reason South African industry had to suffer the indignity and cost of Telkom's poor service and high charges. "Investments had to be protected", claimed the Minister. A five year monopoly was granted to Telkom in return for an increase of 2 million lines to rural areas. During this period of exclusivity the number of fixed lines did not increase, they actually declined. At the same time the competitive cellular phone industry delivered R20 phones to rural South Africa on packages used by as many as 15 million South Africans. If government were to concede that "managed liberalisation" and "universal access" polices achieved the opposite of the desired effect, and that failure to allow competition harmed the economy, we might feel more confident that the lessons learned would beneficially influence future policies.

Thankfully the block on development is behind us and technology companies are already laying their plans for South Africa's 21st century communications network. The removal of the Voice-Over-IP restriction means all manner of technical cost-savings. For example, companies with large numbers of calls to cell phones will be able to route those calls over Internet lines to their value-added-network suppliers, who in turn will route them to the cellular networks. Such routing cuts out half the use of the wireless network, which can bring about cost-savings of between 30 per cent to 40 per cent. The cost of international calls is expected to drop considerably, as companies lease bandwidth from their network suppliers rather than pay for call time. In fact, we may have to stop thinking of telephone companies and rather start thinking about network service companies because that is what they will become. South Africa has 80 internet service providers that can become "telephone" companies on February 1 when the Voice-Over-IP restriction. is removed. We can expect at least ten to twenty of them, and possibly even more, to immediately start offering the expanded services.

Is this new development a disaster for Telkom? Not in the slightest. I would, in fact, be a buyer of their shares. They have lost their monopoly, which allowed them to charge for services that people did not value. People can be gouged up to a point on their phone bills but will then cut down on usage. However, anyone running an internet businesses on a cheap ADSL connection, generating income in the order of R20,000 per month, will be in a position to buy more services from Telkom because those services will create additional wealth. As the focus in the economy switches from rent-seeking to value-adding behaviour, Telkom will gain most from the new products and services that broadband will bring. Many studies show that there is significant growth in the telecomms sector after privatisation and liberalisation and incumbent operators usually enjoy the largest gains. In fact, everybody is a winner, current operators, new operators and consumers.

South Africans are now back in the race. We adore technology and are "fast adopters" so our benefits will take a quantum leap as we gain more than most from the globalisation of electronic services. Government’s new policy is enormously positive and growth in this sector should show up fast. Telkom may be trimming back on staff but new network services companies will be hiring. There is work to be done! What we mustn't do is shoot ourselves in the foot by introducing unnecessary new restrictions, especially not in the form of a misguided Convergence Bill. Bureaucratic legislation would do a great deal of harm, produce no benefits and be unnecessary in the enlightened new environment.

The very name of the Convergence Bill is a misnomer as it attempts to "diverge" the industry into four not very clearly defined sectors. Political planners believe the market can be segmented into infrastructure companies, network companies, application service companies, and other content providers. Who says there should be four? Why not one, or six, or ten? What happens if a content provider provides both application services and content services, and brands some network services. How would such a firm be classified? And is there any purpose in attempting to require such a classification?

Such arbitrary classifications, whether they are horizontal, vertical, diagonal or whatever, are political and not technical classifications. Real day-to-day demand will result in a mix of products meeting all kinds of customer needs. Consider Virgin's venture into the cellular phone industry in the UK. They didn't own a network but provided a brand and retailing expertise. Who knows what we might end up with? As long as there are paying customers, experimentation will create an ecology of different service combinations and no political intervention should attempt to guide or regulate the outcomes. Following this massive change to the sector there should be a moratorium on any further regulation or legislation until the industry has adapted to the new environment. As the Free Market Foundation has maintained on numerous occasions, there is no regulatory gap for people to be concerned about. Common law and existing statutes provide a more than adequate legal framework for the conduct of business and protection for consumers. Nothing more than the Minister’s announced changes are required to provide everyone with the communications environment that they have been dreaming about.

South Africa is set to join other countries that are developing rapidly as a result of the use of superior modern technology in their communications. The government is to be congratulated on its far-sighted move, which will give economic growth and development a much-needed shot in the arm. The new policy will allow South Africa to leap from the information dirt road onto the information super highway. We can all anticipate exciting times as we get ready for the ride. Let's get going!

Author: Neil Emerick is an independent policy analyst. This article may be republished without prior consent but with acknowledgement. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article \7 September 2004