SA's USALs get off to a slow start by reselling mobile minutes

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South Africa's Under-Serviced Area Licences (USALs) were aimed at providing services to areas of low teledensity. They have taken a long time to come to fruition and a number of those interested suffered severe financial problems during this waiting period. Each has been offered a subsidy to meet particular rural area roll-out targets. But as predicted by the sceptics, few have plans to roll-out low-cost infrastructure locally. Balancing Act's Isabelle Gross looks at how the licensed USALs are making progress.

While Telkom SA is installing WIFI hot spots in major cities to satisfy the ever-growing need of mobile workers to be connected all the time, some other areas of the country are still without any means of communication. To address this uneven coverage, the Under-Serviced Area licences scheme has been put in place to improve access to telecommunications in geographical areas with less than 5% teledensity, meaning less than 5 fixed lines per 100 people. The initiative is the result of a combined effort of the Independent Communications Authority of South Africa (ICASA) and the Universal Service Agency (USA). The former provides the licensing framework and the latter the funding.

After a wait of several years after the initial announcenent, a call for tenders for the first four licences was issued during 2004 along with a subsidy of R5 millions to each licensed company. The first four companies were Bokone Telecommunications, from the Capricorn District in the Limpopo Province, Thinta Thinta Telecommunications from Ugu District, Kingdom Communications from Zululand District in the Kwa-Zulu-Natal Province and Ilizwi Telecommunications from the OR Tambo District in the Eastern Cape Province. Three additional licences have subsequently been granted in 2005.

The terms for the licence were set by ICASA in the invitation tenders issued in January 2005: “the licence shall include at a minimum local voice telephone services, fixed mobile, data services, emergency services, directory services, voice over internet protocol, public pay phone and operator-assisted services. The USALs shall take into account the requirements of business and residential users and the provision of modern information services.” As Amatole Telecom CEO Mike Matibe explained, there is no restriction on the type of telephony service offering nor on the technology used. The only restriction is in terms of geographical coverage, which for Amatole Telecom, as its name suggests, relates to the Amatole District in the Eastern Cape Province.

On the funding side, the USA has granted each successful applicant ZAR5 million (approx US$780,000) for the first year. However subsequent tranches of funding will only be released once each company’s performance targets are met – these relate to the number of customers connected to the firm’s telephone service. Figures vary per area but the average target will be for around 3-5,000 new subscribers in the first year. Besides this, the work carried out in terms of building an infrastructure/network is also assessed prior to the injection of “fresh cash”.

Each new licensee has its own view on how to deliver a telephone service to people which up to now have had difficulties accessing a telephone network. Bokone Telecoms, which covers the Capricorne District has not yet started to operate, although it received its licence in November 2004. According to CEO Tebogo Mogashoa, his company expects to launch its service in the first quarter of 2006. So far they have been evaluating the different technologies available to deliver telephone services, including hardware providers, billing software and network software. Alongside this short-listing process, they have also re-evaluated their business plan.

Each licenced company seems to follow its own calendar and pace, when rolling out a service/offer. Other licensed companies have taken the view that the earlier they get to market the earlier they will start to make money and meet the required targets. Therefore while they are assessing the technology to be used and the suppliers’s offers, they have started to resell mobile phone services, either under their own brand like Thinta Thinta Telecoms, or under the brand of the mobile operators. Amatole Telecoms and Bokamoso Consortium have signed a roaming agreement with Vodacom and currently resell its services. Bule Mhlongo, CEO of Thinta Thinta Telecom, has opted to resell a telephone service under the company’s own brand using the MTN network.

Faced with challenging goals, these companies have taken the approach that their service should be implemented very quickly, enabling them to start building a customer base which in return will ensure them a regular revenue stream. Dominique Makheti, CEO of Bokamoso Consortium, said that the point is not so much about creating a new infrastructure, but to use the existing one, which is under-utilised. Therefore most of the companies have started offering service in the most populated areas, leaving remote rural areas for the next phase. For the mobile operators that underwrite such firms’ service/infrastructure this appears a good deal too, as it allows them to expand their market penetration at low cost.

The financial risks, such as marketing expenses and the building of distribution channels are sustained by the new USAL licensed companies. There is no other alternative to this, as all share the view that the R5 million grant is not enough to cover the costs of building a firm’s own network. Firms therefore have to secure alternative funding, or get backing from private investment funds. However new wireless should have enabled the USALs to take a low-cost route but few seem to have taken this route.

The tasks and risks ahead for these new types of telecommunications companies are many-fold. Will they be able to establish a sustainable/profitable business in the mid-term? A firm can expand its business by widening its service offering – and all companies have plans to offer some form of internet connection system on top of their telephony services. The main limit to growth is that the service that such telco companies may offer is restricted to the geographical area covered by the license. This restriction at first might be seen as positive, as it offers some protection from competitors, but as the business has to grow to survive this protection is ultimately likely to limit expansion and threaten the long-term viability of such firms. Moreover, nothing stops the incumbent national telecom company or the mobile operators from taking a more pro-active view and developing their own service in these areas.

South African cellco MTN has recently teamed up with Ericsson to test HSDPA-enabled W-CDMA fixed wireless access (FWA) services. (see news item in Telecom News below) MTN envisages the use of the service to provide broadband internet connectivity to remote areas and those not yet covered by traditional fixed line technology. With competition of this kind ahead, it's unclear what kind of financial future the USALs have, except perhaps as resellers for the existing mobile companies.