5 April 2002

Top Story

Small ripples on the surface of the lake often signal bigger things happening below the surface. Last week a UK-based independent telecoms company specialising in African markets (Gateway IP) bought a South African company called FirstNet that runs local and international data networks for many businesses in the health care, insurance, retail, manufacturing and transport sectors. At the beginning of this month BT wound up its loss-making international joint venture with AT&T and vowed to concentrate on its domestic UK business. Russell Southwood talks to Gateway IP’s founders and looks at how these two seemingly unrelated events may be the slow beginning of more open markets in international connectivity.

In the beginning, most newly-independent African countries inherited state telcos that had been set up and run by their former imperial masters. In order for them to connect with the outside world - whether directly or through other countries (so-called transit calls) - they tended to route their calls via the state telco of the imperial power. So those ruled by Britain went via BT and those ruled by France went via France Telecom and so on.

These rates were negotiated bilaterally but fixed in relation to the "international accounting rate" system - an opaque price-fixing mechanism of byzantine complexity run by the International Telecommunications Union (ITU). As a rate fixed largely between governments, it was for many years a powerful reference point for charging between African telcos and their counterparts in the North. These cosy arrangements were sealed by the monopoly on terminating international calls held by state telcos. With the coming of market liberalisation in the North, the system began to break down and the price for selling international calls began to fall below the international accounting rates.

In Africa things have moved more slowly but the forces of international competition are nonetheless gathering momentum. There are now several companies - including ITXC, iBasis and more recently Gateway IP - offering cheaper and better international connections: their business model is not based on being a traditional telephone company. Indeed the collapse of Concert may be a sign that this kind of international business is no longer profitable for some companies.

Whether offering internet telephony or other forms of networks, the new independent providers are undercutting the traditional international telcos. In many African countries there are also flourishing "grey" markets in international internet telephony (VOIP). For some countries this is simply an irritant to be attacked with occasional police raids but for other less stable countries it has eaten away large amounts of their state telco’s lucrative international traffic.

Even the African telcos with international monopolies are beginning to realise they can do better for themselves. For example, the lack of direct connections is particularly acute in Africa. The case of Chad highlights the situation. It used to have only 16 international circuits, all with France. Of its 1.6 million minutes of traffic in 1995, 69% ended in France while 29 per cent transited through France (two percent went to neighbor Cameroon but routed over national circuits). Recently however the Chad state telco has signed an agreement with VOIP carrier IXTC that will lower its outgoing call costs. Inevitably the balance of power will shift.

Chile’s opening up of international calling to competition has driven down the costs of international dialing for its citizens. Nearly everywhere that international competition has been introduced, the cost of connecting has fallen. Indeed there is some evidence (by no means conclusive) that international leased-line prices charged by telcos in the North have over-generous margins. Gateway IP and others are gambling that the South African government will open some areas of international traffic to competition. The question of legalising VOIP is a recurrent question in the current policy debates in almost every African country.

It has been a long time in making but the moment has come to pronounce the international accounting rate system dead, especially for those in developing countries. Its interminable, inconclusive debates have little or no relevance in a world in which there are a wider range of independent suppliers and the beginnings of an international market place in connectivity. The ITU’s members could decide to devote the staffing and resources currently used to service these discussions to finding effective ways to close the digital divide. African governments should ask themselves whether this particular aspect of the ITU’s work is an effective way to protect their telco assets, the effectiveness of their economies and the interests of their citizens.


So much for the big picture, back to the small ripple. Gateway IP used to be a subsidiary of North American Gateway, a telecom wholesaling business in Canada. In April of last year, it was the subject of a management buy-out and is now a UK company owned by an offshore holding company. It has chosen to focus on three markets: Africa, the Middle East and Central Asia. It currently has a turnover of US$12 million and claims to be growing rapidly.

It is in the business of wholesaling what in the jargon are known as "terminated minutes" and is looking hard for bilateral deals with PTTs, cellular operators and ISPs. For African PTTs that do not have a cost-based system for recording and charging for international calls, it can offer these systems as part of a package that includes managing credit, collections and transit operations. With its own switching facilities in New York and London it interconnects with many tier 1 and tier 2 international carriers. As Peter Gbedemah, its CEO puts it:"We offer PTTs a way of bring their international traffic back under their control. We can offer direct dialing routes to many countries".

It seeks to place itself on the side of the hard-pressed PTT:"Our key is to look at ways in which we can both maximise our profits." This has a slightly different sound to ITXC’s pitch which emphasises the ability to lower call costs. Gateway IP currently has around 12 customers in Africa and sees South Africa, Egypt, Kenya and Nigeria as large markets. It is also interested in smaller markets like Somalia, Sierre Leone, Eritrea and Ethiopia where the PTTs will be interested in keeping their rates up.

Its purchase in South Africa is a way of positioning itself to enter the wholesale market for the corporate sector:" The enterprise space is one we want to move into. We want to create pan-African, managed data networks and to position ourselves for the deregulation of the voice sector in South Africa. It will take a year or two, but we believe there will be opportunities to carry voice on a private basis." It is not necessarily looking for acquisitions elsewhere but wants to to find partners with customer bases and networks that it can acquire equity stakes.

It believes that privatisation of PTTs in Africa will take between 2-10 years. Where monopolies exist, it will seek to work with the PTT and in more open markets, it will seek partners. The profitability of its current wholesaling business is tied to the higher margins currently achieved by monopoly suppliers. Long-term, it wants to become a corporate supplier where the margins are "more predictable and sustainable."