Parliamentary Portfolio Committee Hearings on the Convergence Bill

Parliamentary Portfolio Committee Hearings on the Convergence Bill Prof Alison Gillwald LINK Centre Graduate School of Public and Development Management Witwatersrand University 10 August 2005 PPC Hearing on Convergence Bill August 2005

Learning Information Networking and Knowledge (LINK) Centre • Response to ICT policy and regulatory training and research vacuum • Independent, multidisciplinary ICT policy and regulatory training and research centre • Professional development training through to post graduate courses - Master of Management ICT PR, Ph. D Research • To satisfy the growing demand for information and analysis needed for appropriate policy formulation and effective regulation • Africa research network – Research ICT Africa! - to build research capacity and inform decision-making and governance structures • Create body of African public domain research and debate and to provide a repository of data, metadata, analysis and knowledge PPC Hearings on Convergence Bill August 2005

Purpose of presentation • In policy, like driving, although the windscreen seems to provide the obvious view for where you need to go it is critical to look back through the review mirror before trying to proceed forward. PPC Hearings on Convergence Bill August 2005

Is intervention needed? • Why don’t we just carry on as we are? – Results of first two rounds of reform only partially achieved objectives • Strong growth: 1994 – 2002 of around 5 billion a year. • 2003/4: flatter growth - still 14% • R 74 billion revenues (2004) • 6% contribution to GDP (2004) • Fixed line teledensity < middle income countries (excl Mexico, Morocco) • Evidence of high costs inhibiting growth PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review Telecom • Fixed – Commercial successful fully digitised, partially privatised, high shareholder value public network – Social mandate largely failed: little progress on affordable universal service (high retail prices/monopoly rents) – National economic contribution: high wholesale prices and evidence of anti-competitive behaviour; high input cost to cost of business, disincentive to investment – De facto monopoly, SNO delays – Not critical mass, no network effects, limited multipliers PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review SA: Telephony Access, 2001 No access Neighbour not nearby Fixed & mobile access Another location nearby Fixed access only Mobile access only Public telephone nearby At a neighbour nearby Household Telephone Penetration – 2001 Census PPC Hearings on Convergence Bill August 2005 Source: USA

The South African Communications Sector Review Access remains racially skewed 2001 Census From: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review PSTN Affordability Telkom prices 1997 – 2004 = 21% CAGR Treasury report – telecoms prices excessive Labour Commission - measurable impact on inflation Productivity factor = 1, 5% (UK = 7. 5%, USA = 6. 5%, Mexico = 3%) Efficiency Research – SA Foundation From: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review PSTN productivity, 1998 – 2004 Source: Telkom cf Mobile productivity (2004) =2 200 lines / employee From: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

Why is intervention needed? 2 • Mobile – – – Major contributor to universal access Relatively unregulated High prices (SA Foundation & ICASA regs) Price setting characteristic of duopolies Critical threshold for network effects to kick in Economic and social multipliers • USALs - Unenabling regulatory environment, stripped of business case, essentially mobile franchisees – no innovation around ownership, technology, and access. PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review Telephony rollout, SA (1997 – 2004) From: RIA! Towards an African e-Index 2005 Sources: Telkom, Vodacom, MTN, Cell C PPC Hearings on Convergence Bill August 2005

The South African Sector Review Mobile Telephony Tariffs From: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

ICASA Mobile Pricing Discussion Paper August 2005 PPC Hearing on Convergence Bill August 2005

Average Revenue per User (ARPU) The impact of pre-paid Source: ITU African Telecommunication Indicators 2004 PPC Hearings on Convergence Bill August 2005

Is intervention needed? 3 • VANS – Telkom’s dominance of this competitive segment of the market and requirement to acquire facilities by competitors from Telkom chilling effect. – Ministerial directives good, claw back on selfprovisioning in monopoly environment negative. • Internet – 80% of ISP costs directly to Telkom – Internet penetration plateaued – Purposes of Electronic Communications Transactions Act undermined - PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review Cost of Internet Access From: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review Internet Growth (1997 – 2004) From: RIA! Towards an African e-Index 2005 Source: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review • • Broadband 656 000 ISDN subscribers (2004) 60 000 ADSL subscribers (2005) Vodacom & MTN - 3 G (2005) SA lags other middle-income countries Such as: – – Brazil: 600, 000 (2002) Argentina: 65, 000 (2002) Poland: 193, 000 (2003) Malaysia: 110, 000 (2003) From: RIA! Towards an African e-Index 2005 PPC Hearings on Convergence Bill August 2005

The South African Communications Sector Review • The pressure on ISP fees can also be illustrated by examining the pricing of ADSL broadband. The monthly Telkom fee on a business ADSL connection is R 699. • In addition, the subscriber must acquire an ISP connection, at an average monthly cost of R 250. • The ISP pays Telkom R 190 for bandwidth and R 40 to conclude peering arrangements with South African Internet Exchange (SAIX) (needed to deliver email rapidly). • Thus, on a product which costs a total of R 949, Telkom keeps R 929, leaving the ISP with R 20 in revenue. Source: SA Foundation 2005 PPC Hearings on Convergence Bill August 2005

Broadcasting • SABC – comprehensive PBS in radio and TV • E-TV - free to air competitor • Community radio – widespread but marginal • Subscription service among the most advanced in the world, operating globally • Sentech multimedia and international gateway licence • Orbicom, other SD competitors PPC Hearings on Convergence Bill August 2005

Regulatory environment • Broadcasting reasonably effective: – Relatively successful privatisation of SABC regional radio stations and licensing of greenfield licences – Widespread community radio licensing facing issues of sustainability – Local content music and TV increased and in demand – Independent production still requiring further transformation but gains made – Wider use of official language across free-to-air channels and stations • Achieved under relatively unfettered regulatory conditions but looking primarily at domestic investment • Challenges: Digital broadcasting policy – benefits and dangers of delays PPC Hearings on Convergence Bill August 2005

Regulatory environment 2 - telecom • Mechanism in law to deal with the anticipated market failure – absence of access, inefficiencies, monopoly rents, interconnection and facilities disputes, anti-competitive practice • Regulator under-resourced and under-skilled and structurally compromised by law. • But even experienced regulators unable to deal with inherent asymmetries of information, particularly in case of vertically integrated monopoly. • Creates anti-competitive incentives by playing across competitive and non-competitive elements • Access regulation associated with this highly resource intensive • Together with pressures of licensing new entrants, regulator ineffective system failure delays in introduction of competitors, anti-competitive practice, high retail and wholesale prices. • Conflict of interest for Minister as major shareholder of incumbent, policy maker for sector and licensor of competitors PPC Hearings on Convergence Bill August 2005

Does the bill address these issues? Main fault lines: – Absence of policy, no common vision, like to lead to conflicting expectations and challenges – market structure – creates licensing framework for converged market but does not indicate how market will be horizontally restructured so retains industrial silo approach to telecoms with vertically integrated companies with multiple horizontal licences – No attention to de facto monopolies at either end of the system – LLU and undersea cable essential facilities or at core – self provisioning. – Critical regulatory framework absent, essentially futile exercise without the accompanying ICASA Act – omnibus legislation and inclusion of process provisions aligned to Administrative Justice. – potentially tensions between consumer welfare and investment, policy and regulation, new entrants and incumbents on network and equipment supply, content and infrastructure. • Essentially COMMUNICATIONS ACT of which convergence is one aspect • Broadcasting Act with all content matters in that or all broadcasting issues effectively integrated into Communications Act PPC Hearings on Convergence Bill August 2005

Objects of the Act • Convergence of telecommunications and broadcasting (signal distribution) X • Broadcasting – public, commercial, community √ • Connectivity for all – quality, affordable X • Investment and innovation X • Efficient radio spectrum usage X • Competition X • Open network access & interoperability X√ • Information security & network reliability √ • Multi-channel distribution systems X • BEE, HDI, R&D X • Distinguish policy and regulation X – Ministerial powers (substantive and process) vs regulatory powers (process) PPC Hearings on Convergence Bill August 2005

Some specifics of the Bill requiring attention • Licensing framework, questions of categories (especially appropriateness of application and content services and location of spectrum licence) and types (individual, class, exempt) • Continued co-jurisdiction on major licences and spectrum planning between Ministry and ICASA • Process requirements: Ministerial directives and regulations • Interconnection required at service and network level. • Competition: in not fully liberalised environment anticompetitive behaviour requires sectoral knowledge and experience that seldom resides in a general competition agency, who are better suited to deal with issues of mergers and acquisitions than technical sector specific anti-competitive practices. • Consumer code of practice strengthened by penalty clauses for infringing code of practice. PPC Hearings on Convergence Bill August 2005

Intergrated information policy Sector regulation - public utility - consumer welfare Broadcasting – content § Public broadcasting § Genres National policy Telecommunications - infrastructure § Local content • Regulated § Independent production competition Information policy • Industrial policy • Innovation policy • IPR • Privacy • Surveillance • Access • Pricing • Quality IP • Internet Competition – perfect markets PPC Hearings on Convergence Bill August 2005 International governance

What is to be done? • Information society initiatives across the globle – Europe described as messy, contradictory and uncritical • Recognise tensions between objectives of consumer welfare, investment, industrial policy - prioritise and create tools to manage them • Integrate information policy across line ministries – communications, trade and industry, science and technology, arts and culture • Human capital development - Specialised decision-making agencies require specialised owned knowledge – PPC, DOC, ICAS, USA. • Without highly skilled, realistically resourced, politically and commercially unfettered, transparent and publicly accountable regulation, the objectives of this bill will not be met: • Complete package to be effective – degree of market failure inevitable, regulatory failure can destroy market. – – No consumer welfare – access or affordably No investment No effective competition No pervasive, seamless affordable integrated infostructure for national economy • Regulation engine of policy, licensing framework, transmission system. PPC Hearings on Convergence Bill August 2005

More information on. . http: //link. wits. ac. za http: //www. researchictafrica. net or contact: Gillwald. a@pdm. wits. ac. za Wits LINK Centre, 011 - 7173913 PPC Hearings on Convergence Bill August 2005