Getting connected - a telecomms special

11 August 2000

Top Story

The investment required for internet connectivity in Africa will only come with competitive markets. The key to achieving competition in telecomms is the regulatory and legal framework. Financial Times' Latin American Editor Richard Lapper looks at the experience of telecomms privatisation in Latin America and the lessons for Africa. Daniel Espitia describes how the South Africa telecom regulator is failing to make the bold moves required for a digital future.


Over the next few months executives of the world's largest telecommunications companies will become more familiar with the Latin America. The region will be at the centre of attention for many reasons. Two governments - Argentina and Venezuela - are implementing an additional round of deregulation, while a third, Brazil is offering the opportunity to foreign investors to participate in its rapidly expanding mobile telephone market.

The reforms planned by Argentina and Venezuela are part of a wave of new changes aimed to increase competition in local markets, following the privatisations of the late 1980s and early 1990s.

Between 1987 and 1996, Argentina, Chile, Peru, Venezuela and Mexico all privatised as a way of introducing private sector management and gaining access to international capital markets and state-of-the-art technologies.

In Chile privatisation was accompanied by a thorough going deregulation modelled on the most advanced US and European practise. Chile, for example, took steps to open the local long distance market and international markets to competition in the mid-1990s.

Last year the government announced that it was extending competition to the so-called local loop - the network of telephone lines linking a local exchange with retail customers. In the most radical deregulation anywhere outside the US, CTC will be forced to share or lease its local lines to competitors in order to drive down prices and improve standards of service.

Elsewhere, however, the more radical instincts of regulators were held in check by the need to ensure continued investment in infrastructure. Although telephone density is more than 20 per hundred in Chile, Argentina and Uruguay, in many smaller and poorer Latin American countries it is less than ten per hundred.

Regulators from countries such as Peru argue that there is little point in developing more competitive services for the better off minority who own telephones if this makes it even less likely that the poor majority obtain any access to telephone services at all. As a result, incumbent companies such as Telefonica del Peru, Telmex of Mexico, and Cantv of Venezuela have been allowed to continue to monopolise local service provision for a limited time in exchange for commitments to invest in new capacity.

These temporary monopolies are now coming to an end. Until last year, for example, Argentina's two main operators - Telcom (controlled by Telecom Italia and France Telecom) and Telefonica (owned by Telefonica of Spain) - enjoyed exclusive control over the south and north of the country respectively.

In November both were given permission to compete nationwide, along with an additional two companies - Movicom (owned by Bell South of the US) and CTI (owned by GTE of the US). From November this year more companies will be allowed to come in.

Brazil was later to privatise than its neighbours but it has sought to introduce a more competitive framework alongside the new ownership structures. Just over two years ago, Telebras was broken up into 12 companies, most of which were based on the former state-monopoly's regional units. Three of the privatised companies offered wireless services, while a fourth - Embratel -controlled the local long-distance market. Early last year, in order to stimulate competition the government auctioned a series of "mirror" licenses to companies prepared to compete in either these regions or sectors. Next year's auction of new mobile licenses will lead to even greater competition.

Some countries continue to resist liberalisation. Trades unions and other vested interests have successfully blocked privatisation in Ecuador and Bolivia for example. The Colombian government has been unable to persuade foreign investors to buy one of its publicly-owned companies - the Bogota Telephone Company - because of worries over security. In the Caribbean Cable & Wireless has successfully resisted challenges to its private monopoly on a number of islands, even though many regional leaders now recognise that the high costs that result from its stranglehold are holding back economic development.

This contrast between gradually liberalising and more competitive bigger markets and technologically backward or inefficient smaller ones is likely to become starker as a result of technological change. Two trends in particular are worth noting. First, a number of companies are now making expensive investments in fibre optic cabling that will increase the speed and reliability of data transmission and link the region to the so-called internet backbone. These investments will allow operators to buy huge amounts of additional capacity and will help drive down tariffs.

Secondly, the development of broadband wireless technology through technologies such as local microwave distribution will allow new entrants to challenge incumbents in retail markets more easily. Already a number of companies are examining these possibilities as a way of reaching Argentine customers more effectively.

The lessons for Africa might be summarised as follows:

- It is is possible to create extremely competitive markets where teledensities are higher, typically 20 per hundred. Chile's plans to open up the "local loop" are ahead or in step with developments in Europe and North America.

- Where there are lower teledensities, existing monopolies have been extended to allow a period of "catch-up" to allow the development of a greater level of teledensity. The market will not deliver social obligations like "universal access".

- Latecomers can privatise quickly. The example of Brazil shows what can be achieved where the political will exists.

- As deregulated markets develop, there is a real danger that there will be a two-tier market structure: larger. competitive markets and smaller technologically backward ones. In African terms, the larger markets are countries like Egypt, Nigeria and South Africa.


Telkom's exclusivity is to run out in May 2002, and assuming it fulfils its roll-out targets by then the South African government can, at its own discretion, extend it for one additional year.

Times around the end of a monopoly exclusivity are usually festive times; with new companies gearing up to participate, new investments in much needed infrastructure, and a public anxious to have some release from asphyxiating monopoly prices. In South Africa it is rather a time of uncertainty and anxiety in the industry. Why?

Firstly, post-exclusivity policy has been lacking in substance or arguably even existence. At the time of the Telecommunications Act of 1995, it was established that there would be a second carrier once Telkom's exclusivity ended, and that was about it. Times have changed but the government has been unwilling to question this duopoly formula: it seems written in stone. Sadly public discussion on the matter has been rare.

Only two companies, Eskom (for its plans see News Update 33) and Transnet have been preparing large investment plans with the aim of becoming the possible second carrier. One doesn't really know whether they are expected to merge or do what with their infrastructure, if one of them is not the chosen mate. Not only that but no-one really knows what services are implied in the duopoly.

The natural consequence of this is that the post-exclusivity playing field is largely undefined, and this will effectively and implicitly extend Telkom's exclusivity, as new entrants will not have enough time to prepare sufficiently for "playing at their best" in the post-exclusivity period.

Secondly, the regulatory authority has lost a great deal of credibility. The "best guess" is that ICASA (former SATRA) is unlikely to extend Telkom's exclusivity. This judgement is based partly on Telkom's dismal performance on rural roll-out even though this has been the core policy of the Government. No one really knows what to expect, and there has been no official word from ICASA as yet. Just to make matters slightly more uncomfortable, ICASA has been haunted by very questionable decisions concerning the issuing of the third cellular license and is widely perceived as needing some exhaustive house cleaning.

For its part Telkom has been fiercely predatory, trying to extend its monopoly first to Internet provision and then to value added services. It has argued for a further extension of its exclusivity until May of 2003 in order to fulfil 90% of its roll-out commitments. This means effectively that Telkom wants a change in the rules, even though it has called its roll-out "very aggressive" and has made more than US$120 million of planned investments.

More recently there have been signs from Government that it indeed wants a more competitive telecommunications industry, but lack of necessary details on such good intentions keep the uncertainty barely tolerable.

What is at stake is the future of a South Africa with a state of the art, competitive and open telecommunications environment. South Africa has been well on the road to prosperity but it has become a sleeping giant, unable to bold move in one of its most critical moments. Rural development, a key policy for South Africa and the rest of Africa holds the key to when the bold move might be made. Until then

those decisions, and whenever those decisions will be made. Meantime, we wait for the giant to wake up.

Daniel Espitia is President of Group Gyroscope, consultants specialising in Telecommunications Regulation Strategy. ( )

Background reading for those interested in this topic:

Executive Editor of Communications International Vineeta Shetty has written an article looking at the costs and dilemmas of seeking to provide universal access worldwide in an excellent article that can be found by clicking below:

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