BUSINESS TECHNOLOGY MEDIA COMPANY
Companies
Sectors
Telecoms

Dial 'M` for monopoly

In an ideal world, local telephone calls are free, voice-over-IP makes international calls inexpensive and telephone network operators scramble to deliver the best service. Will this happen in SA in 2002? Don`t hold your breath.
Read time 5min 40sec

When Telkom`s 25-year licence was issued in May 1997, the five-year exclusive period it granted for the operation of most fixed-line services was a political decision.

The government had a stated objective to make a telephone available in every rural village. The only way of achieving such an ambition, it was decided, is to give exclusivity to Telkom. Exclusivity would protect the operator`s revenue and could be linked to roll-out targets.

The world of telecommunications has changed since that decision was taken in 1995, and the Department of Communications is willing to admit it. Andile Ngcaba, director-general of the Department of Communications, muses that hindsight is perfect. "There is an argument that says we should just have opened up, that those rural areas would have been connected through competition," he said at a telecommunications conference this year. "But connecting a village is a big expense and you need some kind of incentive to make it happen. Exclusivity gave us a more certain method of getting those lines to those villages."

Mistake or not, the government does not intend to violate the licence terms and Telkom will apparently keep its protected status at least until 7 May 2002. However, the communications ministry has indicated that it will license a competitor during 2001, so that any new entrant or entrants can treat 7 May 2002 as the switch-on date.

It is estimated that the second operator will need six months to complete planning and one year to roll out network infrastructure.

The licence provides for a sixth exclusive year as part of its incentive. If Telkom reaches 90% of its five-year line target and 80% of its under-serviced areas line target a year early, by May 2001, it would be entitled to a one-year extension of exclusivity. But comments from the Department of Communications indicate that it is not considering the extension as a possibility.

Post-exclusivity regulation

Competition does not negate the need for regulation. In fact, two companies at each other`s throats may keep the regulatory authorities busier than ever.

In a paper delivered at the Tel.Com 2000 conference in May, International Telecommunications User Group (INTUG) chairman Diana Sharpe laid down the conditions a new player entering a former monopoly market needs to succeed. They include:

  • Regulatory control of the former monopoly to stop abuse.
  • Interconnection and leased lines at cost-oriented prices.
  • Number portability.
  • The re-balancing of tariffs.
  • The unbundling of the local loop.

"Without these conditions, investment [into new operations] is unlikely to flow," she said.

Graham Mead, external liaison of the Hong Kong Telecommunications Users Group, said light-touch regulation has failed in the Asia-Pacific region. "The problem essentially is that a dominant operator is in such a commanding position right from the outset that he can frustrate any competition that appears," he told delegates at the Tel.Com conference. "Competition will not develop where the regulatory body does not have the power or the will to force such a development."

Selection

The number and strength of the likely contenders will make selection of the winning bidder a difficult process. While the UK enjoys the simplicity of auctioning telecoms licences to the highest bidder, countries like SA and Scandinavia use what INTUG`s Sharpe calls "beauty contests" to select operators.

Will the fiasco of the third cellular licence force the government to rethink its selection methods? A member of the parliamentary portfolio committee on communications has commented anonymously that simple auctions are a less political avenue. "This is, after all, a business. Why should the decision not be made in a business manner?"

The selection process for the third cellular licence considered five main criteria: empowerment, technical, business plan, universal service and the impact on the telecommunications industry and consumers.

Bidders were expected to outline their financial plans and the blueprints of the planned network, and had to prove that they intend to make a difference in the lives of under-serviced populations. The ownership of the holding companies, the financial position of backers and the experience of the operator were major considerations.

Electrifying competition

The second operator may not be a completely private enterprise at inception. Two parastatals, Transtel and Eskom, have infrastructure in place which, when combined, could provide a foundation for a relatively cheap national network.

Eskom has developed what it describes as a "very fast" way of lashing Fibre Optic cables to electricity cables without interrupting power transmission. Line workers use a specialised lashing machine to install the fibre on the ground wires of high voltage lines, secured by Kelvar tape.

Eskom chairman Reuel Khoza has estimated that 15 men using a single helicopter can install broadband fibre communications between Cape Town and Bulawayo in four months.

Eskom has 250 000km of high voltage lines at its disposal. Any other entrant would have to negotiate the right to bury cables or plant pylons with individual landowners. In the words of HSBC European telecoms analyst Steve Scruton, you would "have to negotiate with all the farmers between Johannesburg and Cape Town to dig a two meter trench through their land".

Transtel has 8 500km of underground trunk cables, microwave links of over 9 000km and a combined 90MHz of satellite bandwidth in the C and Ku-bands. It also has experience with voice and data networks, a cellular division and a recognised brand.

The Department of Public Enterprises has confirmed that Eskom is working with other parastatals on a possible combined bid. All that would be lacking in a combination between the two is financial backing and the help of an experienced international network operator. The third cellular licence process has proven that neither are scarce resources.

Other contenders could include British Telecom and AT&T, as both have operations in SA. Industry watchers expect the real battle to be which of the two players will partner with an Eskom/ Transtel consortium.

Conclusion

Before the government invites applications from bidders and gives an indication of the probable licence conditions, the players cannot compile business plans. And before business plans exist, the impact on pricing and services cannot be estimated. But with the cost of a network rollout to recover, a new player may not be keen to challenge the Telkom pricing structure.

Have your say