Convergence Bill: hearings

Meeting report

COMMUNICATIONS PORTFOLIO COMMITTEE
17 August 2005
CONVERGENCE BILL: HEARINGS

Chairperson:

Convergence Bill [B9-2005]
Autopage Cellular PowerPoint Presentation
Altech Annual Report [available at http://www.altech.co.za]
Motorola PowerPoint Presentation Part 1
Motorola PowerPoint Presentation Part 2
Vodafone PowerPoint Presentation
Nashua Mobile PowerPoint Presentation
MWeb PowerPoint Presentation

SUMMARY
In the morning session, Autopage Cellular, Motorola and Vodafone presented their comments on the Convergence Bill [B9 – 2005]. Autopage Cellular focused on the need for the deregulation of the sector and the promotion of competition. The international innovation of independent Virtual Network Operators (VNOs), which combined services from various operators to provide competitive offerings, was submitted as a viable option for South Africa.

Motorola stressed the part telecommunications could play in wealth creation, and the need for innovation, competition and freedom of choice. Legislation and regulation should be limited to the most essential areas, such as the radio frequency spectrum, numbering schemes, and cabled systems. Internationally, regulations were increasingly viewed as enabling, rather than inhibiting.

Vodafone spoke to the Committee from the viewpoint of a foreign investor. They highlighted the lack of certainty and clarity in the licensing framework. Certainty was a key requirement for encouraging investment, and the Bill’s failure to expressly provide that existing licence rights and obligations would not be materially changed in the licence conversion process, was of great concern.

The Committee engaged the presenters on the proposals that there should be open competition, suggesting that a measure of ex-ante legislation was essential in South Africa. In terms of the radio frequency spectrum, Members noted that the regulator did not have the capacity to deal with the issue, and that there was still no migration as proposed for the security forces. The Department of Communications emphasised this particularly.

In the afternoon session, Nashua Mobile, as an independent cellular solutions provider, felt that licensing independent service providers such as Nashua Mobile could foster competition. This would hopefully bring down the overall costs in telecommunications.

MWeb felt that the Independent Communications Authority of South Africa (ICASA) had not been sufficiently empowered to take the necessary steps to regulate prices to address the high disparities in market power. Interconnection was one of the most important aspects of the Convergence Bill. The current entitlement of Value Added Network Services (VANS) to interconnect with public service telecommunications service (PSTS) would be taken away by the Convergence Bill. Furthermore, the current draft of interconnection guidelines contradicted Chapter 7 of the Convergence Bill. VANS limitation on interconnection would have a detrimental effect on the South African economy.

The Committee asked for clarity on the issues of interconnection and self-provision. The Department of Communications explained that in the future, everybody would be allowed to apply for network licences. Members expressed concern about the unsatisfactory access of the population to telecommunication systems, the Ministerial ITA, and the adverse effects of self regulated markets.

MINUTES

Autopage Cellular submission
Mr G Passmoor (Group Executive, Altech) commented on certain key objectives of the Bill. The promotion and facilitation of convergence of telecommunications and broadcasting signal distribution, in the telecommunications area, primarily meant the competitive bundling of communications services. Internationally, this was done by independent Virtual Network Operators (VNOs), which combined services from various operators to provide competitive offerings. As the largest independent service provider in the cellular industry, Autopage Cellular was capable of graduating to a VNO role in the industry.

The deregulation of the sector and the promotion of competition were critical to opening the sector to new players, technologies and investment, resulting in better, more competitive and widespread communications services. Communications Service Licensees (CSL) would gain licensed recognition under the Bill, but no further rights and obligations. This would further stifle innovation and investment through litigation and disputes. New ventures would allow for further incorporation of empowerment at all levels, and the Altech Group and its subsidiaries including Autopage Cellular supported empowerment, with a track record of successful Black Economic Empowerment (BEE) partnership and broad based empowerment achievements.

There were specific concerns with the Communications Network Services Licenses (CNSL). They appeared to be designed to limit licenses to existing incumbent operator licenses, and new applications for CNSL would be protracted, discouraging investment and innovation.

Motorola submission
Ms J Nwokedi (Director) introduced Motorola as a leading global supplier of telecommunications equipment and services, with an annual turnover of US$30 billion. Motorola had returned to South Africa in 1994, and had made significant contributions to South Africa’s development. Rural areas had been identified as a particular niche market for mobile operators. The so-called digital divide could be smaller in the case of mobile in comparison with other ICTs. The key issue was not mobility, but Internet access, as broadband was undoubtedly the way forward. Economic growth was inextricably linked to technology capabilities and telecommunications services.

Mr R Seeber explained that, although Motorola SA supported government’s initiatives to promote Black Economic Empowerment (BEE), it did not view the Convergence Bill as the prime vehicle for achieving that, but felt that this should be dealt with in BEE legislation, together with the ICT charter.

He propounded four axioms in regard to telecommunications, namely
- that telecommunications could lead to great wealth and prosperity provided innovation in technology and service provision (including convergence) was allowed to flourish;
- that telecommunication innovation had to be enabled, not impeded, by legislation and regulation;
- that innovation (also in convergence) would be enabled by allowing consumers, operators, manufacturers, suppliers and other telecommunication users freedom of choice and
- that freedom of choice required legislation and regulation to be limited to only that which was really necessary. Convergence could take place at different levels. For example, there was commercial, service, network and terminal convergence in fixed-mobile convergence.

Motorola defined seamless mobility as the ability of the consumer and the connecting devices of the consumer to move easily and smoothly between and among Internet protocol enabled technology platforms, facilities and networks, including during the course of a call or of a download. Convergence was likely to fail if any of the following were limited or curtailed: the services to be provided, the network or other facilities to be used, the technologies to be deployed, the prices to be charged, and the way in which services could be bundled.

Fundamental aspects of regulation included
- facilitation for access to radio-frequency spectrum and a reasonable degree of order in its use;
- order in the use of numbering schemes;
- provisions to ensure human health and safety;
- provisions for the emergency-response needs of public-safety agencies;
- provisions for lawful interception to combat terrorism and crime, and
- provisions for cabled systems.
Globally, more emphasis had been placed on regulation as an enabler, rather than as an inhibitor.

In terms of the radio frequency spectrum, the Bill was weak in providing scope for competitive allotment of spectrum where the demand might exceed the supply of spectrum, and in terms of prescribing quick processes for acquiring spectrum by new entrants, especially local or regional market entrants. Although the Bill limited the licences to a few categories, these categories were not well defined. The Bill was also inadequate in respect of provisions for the use of the license-exempt spectrum, as it did not recognise the important global regulatory and technological developments in the use of the license-exempt spectrum. In addition, it was undesirable to require a license for applications. It was also doubtful that the Bill provided sufficient scope for private telecommunication networks, which had been impeded by the Telecommunications Act. An example was given of a school using a virtual classroom, via a private broadband telecom network.

Vodafone submission
Mr N Gough (International Policy Director) noted that Vodafone would be commenting from the point of view of a foreign investor. He emphasised that Vodafone’s investment in Vodacom had been a long-term commitment to the new South Africa. In addition to providing financial investment, Vodafone was a partner providing commercial, operational and technological support to Vodacom. Mobile communications had increased access to telecommunications services beyond the most optimistic estimates, with 36 mobiles per hundred people in South Africa at the end of 2004. A wide socio-economic benefit had been generated by the success of the mobile phone industry.

Investors would always analyse the legal and regulatory environment when making decisions to invest in new opportunities or when reviewing existing investments. They would assess a legal and regulatory framework on the criteria of certainty, clarity, and transparency. There would be particular focus on licence rights and obligations, regulatory decision-making procedures (e.g. wholesale and retail service regulation, dispute resolution, appeal rights) and failure to meet these criteria might deter investors and cause difficulties in implementing the legal and regulatory framework.

It was essential that the Bill’s licensing framework provided certainty and clarity. The Bill was undermined by the failure to provide clear and precise definitions for different licence categories, and it was difficult to understand what types of services were to be licensed under which licence category. Chapters 7, 8 and 10 failed to provide sufficient clarity and precision on regulatory decision-making procedures in relation to wholesale and retail services, and the Bill was undermined by the use of multiple tests, in some cases undefined, which created unnecessary complexities and inconsistencies of approach when regulating such services.

In terms of the conversion of existing licences, a key requirement for encouraging investment was certainty, and on the basis of licence rights and obligations, existing licensees had made investments, which had made a significant contribution to the South African communications success story. The Bill’s failure to expressly provide that existing licence rights and obligations would not be materially changed in the license conversion process unless agreed to by the existing licensee would create significant uncertainty for existing investors. It would also create a concerning precedent for potential investors, who would require sufficient assurance that their licenses would not be materially amended unless for reasons provided in their licenses and in legislation, and with their agreement.

Discussion
Ms M Smuts (DA) noted that Motorola had made a very strong free market argument, suggesting that there should not be an attempt to try to shape the market and outcomes. What was their position on the differences in the sector in South Africa? It seemed to be necessary to do what the Bill was trying to do, and introduce a significant market power test, as South African needed ex-ante legislation in respect of interconnect, facilities leasing and tariffs. The behaviour of some dominant incumbents had to be controlled.

Mr Seeber replied that there had to be a transitional period with some regulations, but competition should be allowed as soon as possible. If freedom was allowed, there could be city or regional operators competing in certain areas. Some unbundling of the fibre optic cable might be part of the transitional measures. If there was a market driven society, investors might be interested in laying a parallel cable. Satellite communications were also a very under-explored industry.

Ms Smuts asked what the specific provisions in the Bill were that were blocking the network "dream" as outlined by Mr Seeber.

Mr Seeber referred to Motorola’s written submission, and noted that it was an issue of having clarity in the definition of communications service, and providing for self-owned networks.

Ms Smuts asked whether Vodafone was on the point of increasing their investment in Vodacom above the current 35%. Mr Seeber had postulated that any foreign investor would prefer minimal legislation, but Vodafone had appeared to prefer strict managed liberalisation. South Africa had had this for a long time, and there was now a need to unleash entrepreneurs.

Mr Gough replied that South Africa had historically had a light touch regulatory framework, and it was important that interventions were defined and implemented on a transparent basis. The processes associated with the frameworks had to be clear. Frameworks were encountered in every country. The introduction of clarity into the Bill would attract foreign investors. Vodafone had made its commitment to South Africa clear, and would consider increasing its shareholding if this would add to shareholder value.

Mr K Khumalo (ANC) referred to the Altron versus Altech issue. How was this being dealt with? Mr Passmoor replied that he was unable to comment on the issue, as it was in dispute and hence sub judice.

Mr Khumalo referred to Mr Seeber’s four axioms, and asked for clarity on the notion that the Bill should have fewer regulations that affected players economically. There was always a desire to have the market determine forces, but this might not be feasible in South Africa with USALs and under-serviced areas for example.

Mr Seeber replied that if BEE had to be dealt with in the Bill, it should be by means of transitional measures. Even if empowerment were not mentioned, it would still come into play. Opening up to market forces was not just bad news for the disadvantaged. There should be something in the Act barring the regulator from intervening in ordinary circumstances, but not under exceptional circumstances, and the issue could be covered there. It would be better to subsidise the user rather than the operator, and use the "carrot" rather than a "stick".

Mr Passmoor replied that, like many private companies in South Africa, Altech was a willing investor in telecommunications. Altech viewed the market in a similar way to overseas investors such as Vodafone. Whatever was required from an empowerment point of view would be complied with, and regarded as part of the company’s involvement in South Africa. A clear and well-understood framework was required, and the process to go forward and apply for rights and licenses had to be clear. There also had to be a visible process for the regulator to deal with issues arising.

Mr Khumalo said there was a need to allow professional standardisation bodies to assist the regulator, and asked whether the suggestion was that the current standards bodies were not good enough. Was there a need for more bodies?

Mr Seeber replied that ICASA was working with the South African Bureau of Standards (SABS) on the issue of standardisation, but the regulator should have the option of insisting on the use of European standards. There should be an obligation to use standards that would enhance competition.

Mr Khumalo asked why, if the Bill was inadequate in expanding the radio frequency spectrum, the presenter had said that the Bill was effectual on the role of the regulator in terms of the radio frequency spectrum.

Mr Passmoor replied that only licensed operators at a network level were entitled to apply for radio frequencies for resale, and this was limiting.

Mr J Mjwara (Department Deputy Director-General: Multi-Media) replied that trading would require a national policy decision, as this was a national resource. This highlighted the need for the Minister to be involved in decision-making. The creation of a specialised agency for this had been considered, but ICASA had been decided upon.

Mr Khumalo asked for clarity on the licensing of application services, as most applications were provided by VANS.

Mr Seeber replied that it did not make sense to have licenses for applications, unless they were in the spectrum or could affect another operator. An application could mean something like MTN’s new banking service. Such license requirements would cause tremendous damage, and the Bill should be very careful.

Mr Khumalo asked about other types of intervention methods encountered by Vodafone, and whether these were more restrictive or more liberal than the proposed South African model.

Ms S Vos (IFP) suggested that presenters had alluded to the need for competent regulation but had said little about the capacity of the current regulator. It was known that the desired investment in the Second National Operator (SNO) had not been achieved because of criticism of the regulator. She could not see BEE happening without international investment, and asked for the views of the presenters.

Mr Seeber replied that it involved clarity and uncertainty, particularly in relation to obligations. If the Bill could move away from obligations towards incentives, this might invite investors. The regulator had good capacity in many areas. There had been a lot of capacity in the last four or five years, but not in spectrum management. The sable band plan was in place, but more money should go to the regulator. The spectrum was key.

Ms Vos asked the position in respect of the sable band plan, and how long the migration would take. The defence forces had large chunks of spectrum.

Mr Seeber noted that the Bill should contain a reference to the new band plan, to place an obligation on the regulator to keep it up to date. It should be updated when there was an urgent need for it, rather than having to wait for five or six years. This was the duty of the regulator, not the Department of Communications.

Mr Mjwara replied that Clause 34 provided for a period of 12 months. The plan was likely to contain all bands and all frequencies, and was bound by IT requirements. The plan had been fragmented in the past.

Ms Vos asked whether 12 months was feasible. Mr Mjwara replied that long processes of consultation might delay the process, but, if the Department was given leeway, the 12 months could be achieved.

The Chairperson noted that this spoke to Vodafone’s concern on decision-making procedures. The Bill was trying to enable the regulator to take as short a time as possible.

Ms Vos said that inventive thinking was called for. Private investors could be called upon to contribute to the cost of migration.

Mr Mjwara noted that the expenditure had to fit in with the Medium-Term Expenditure Framework (MTEF). It was not desirable to have the security forces dependent on the private sector.

Ms Vos noted that she had not suggested that the private sector be given a vested interest, but that they should pay for the migration.

Mr Mjwara replied that it was important to assign the frequency in terms of public interests, and a decision had not been taken, but it would be an interesting discussion.

Ms Smuts noted that Mr Seeber had cited certain categories of spectra, and asked whether he was suggesting keeping the status quo. The new approach was to expand the spectrum commons with shared usage.

Mr Seeber replied that, when he had referred to unlicensed bands, he had been referring to spectrum commons. This should be free for all. It had been found that ISPs who started using wireless would have paid for their networks within nine months.

Ms Vos asked how seamless mobility would be possible, and in what timeframe.

Mr Passmoor replied that as soon as the Bill had been passed, there would be radical changes in the environment.

Nashua Mobile submission
In the afternoon session, Mr M Taylor (Managing Director) explained the background and the functions of Nashua Mobile, an independent cellular solutions provider. Currently, Nashua Mobile was unable to apply to the Independent Communication Authority of South Africa (ICASA) for its own tariffs because the company did not have its own licence. They had to work within the parameters of the filings of the respective networks. Nashua Mobile felt that this was where the Convergence Bill had a gap, both in terms of creating opportunities for other licensees to come on board and being regulated and controlled to offer competition to the market. An appropriate service based license would enable the company to design appropriate tariffs beneficial to their consumers.

The Bill was not only a regulatory legislation, but also had the potential to enhance competition that would hopefully bring down the overall costs in telecommunications. Licensing independent service providers could foster a competitive environment. Nashua Mobile contended for an individualised service license. In order to give clients a choice of the most efficient and cost effective combinations of platforms, a specialised communications service license should be provided for. The licensee would be able to obtain the ability to roam, interconnect and apply for tariffs.

Agreements between individualised service licensees and communications network service licensees for the use of their network infrastructure were necessary. The choice of carrier pre-selection should be granted in order to offer lower costs of calls. Interconnection had to become a right instead of being a privilege.

Nashua Mobile felt that their submissions to ICASA should be confidential because they were business plans. They had made a submission in February 2005 that specifically referred to the paragraphs outlined in the legislation.

MWeb submission
Mr R Heath (General Manager: Regulatory Affairs) remarked that MWeb, an Internet provider, had already submitted a detailed presentation to the Committee at an earlier stage. He outlined the major limitations imposed on Value Added Network Services (VANS) by the 1996 Telecommunications Act. It was hoped that the Convergence Bill could rectify some of the adverse effects such as stagnant growth. The Ministerial influence was reason for concern. ICASA had not been empowered to take the necessary steps to regulate prices in order to address the high disparities in market power. He stressed that ICASA had a lack of skills.

MWeb believed that the Convergence Bill removed the uncertainties regarding self-provision. Mr Heath expressed concern however about limiting VANS to service rather than infrastructure based competition. He encouraged the Committee to reconsider this issue. VANS should be granted both self-provision and the right to apply for frequency. There had never been a clear definition of VANS.

VANS were unable to compete because companies like Telkom were not only their sole provider for facilities but also their largest competitor. Unless special rules for access, interconnection and leasing were set up, there would be another ten years of flat growth. Network licences with Significant Market Power (SMP) should be required to lease facilities and interconnect with VANS at Long Run Incremental Costing (LRIC). An adequate accounting separation was vital for competition. The regulator should be required to enact ex ante regulation to prevent abuse of power of vertically integrated companies. Mr Heath was unsure whether the regulator was entitled to additional licence terms during the conversion process, and asked the Committee to look into this issue.

MWeb felt that interconnection was one of the most glaring aspects of the Convergence Bill. Service licensees were excluded from Chapter seven, and the right to interconnect only existed at a network level. Section 43 of the Telecommunications Act required PSTS to interconnect with VANS. This current entitlement had been taken away under the Convergence Bill. MWeb wondered whether this had legal implications. Even more peculiar, the current draft of interconnection guidelines contradicted Chapter seven of the Convergence Bill. It thus seemed as if ICASA and Parliament were not talking to each other on this particular issue.

Mr M Goliath, General Manager: Technology Operations graphically demonstrated the potential problem that VANS would face going forwards if the limitation on interconnection continued to exist. The Convergence Bill would have a detrimental impact on the South African economy.

Mr Heath said that ICASA’s performance would determine the success of the Convergence Bill. Decisive intervention by ICASA was needed in markets with limited competition.

Discussion
Mr V Gore (ID) asked for comments on Storm’s recent presentation that had suggested that self-provisioning should not be allowed for VANS.

Mr Heath replied that unfortunately, he had not attended the meeting where Storm had given a presentation. He had, however, read an article that had indicated that they were not in favour of self-provision. Storm seemed to be concerned about the imposition of universal service obligations. This was one of the reasons why they argued that VANS should not go into that space. VANS would be entitled to decide which categories they wished to apply for. Storm would thus have the opportunity to go for a service licence. Larger ISPs should, however, have the right to apply into that space if they wanted.

Mr Gore pointed out that they were three tiers in the current structures of the VANS market. He asked where Mr Heath saw these VANS operating in the future.

Mr Heath answered that VANS should have the option to decide which licence category they wanted to get into. If they felt they were big and strong enough to compete in the network space, then they should be entitled to apply.

Ms Smuts queried whether the Department could give clarity on the matter of the right to interconnect. She thought that Storm had argued that not all VANS should be allowed to self provide. VANS should be entitled to either apply for network licences or service provider licences, or both. She asked for further discussion regarding self-provision. Entrepreneurs had to be allowed to apply to the regulator, whereby the latter would or would not give network licences. It was a terrible mistake to allow the executive to decide when network licences may be entertained and in which areas, especially when the technology was running ahead of the law. She remarked that it was no one’s intention anymore to have a licensing category called applications services. Finally, there was no provision in the Convergence Bill regarding cost allocation similar to the one in the Telecommunications Act under Section 46. She stressed that such a provision was needed.

Mr Mjwara replied to the latter that interconnection pricing principles were dealt with under Clause 41 of the Convergence Bill. The terminology had changed and it was much more flexible, but it addressed the same issues.

The Chairperson remarked that the issue to be addressed was not that according to the Bill VANS would not be allowed to provide an infrastructure, but that it was rather a question of them choosing which licence category they wanted.

Mr Heath asked whether the Chairperson was of the opinion that VANS would be entitled to apply for a network services licence.

The Chairperson replied that his argument should be that he was able to provide that area and that he wanted to apply for that area.

Mr Heath answered that this was exactly the argument he would like to make. They should be entitled to provide in the network space. In terms of the Convergence Bill however, he felt that VANS did not have such an entitlement. He asked for clarity on this issue. The Licence Conversion provision of Clause 85 entitled those licensees that had currently an entitlement to build, operate, own, and maintain a network to apply for a network services licence. VANS did not have a current entitlement to build networks.

Ms N Mokoto (ANC) questioned the presenters’ seemingly contradictory approaches of regulation and deregulation. She asked whether there would be sufficient competition in a self-regulated market, especially if there was no watchdog. She further queried whether access to services could be granted to all entrants in such a self-regulated market.

Mr Heath replied that VANS’ entitlement to interconnect would introduce new players into the voice market. Interconnection would enhance competition and may lead to lower prices. He stressed that the result would potentially be positive.

Mr Taylor added that it was a win-win situation, as the consequence would be both profits for the company and savings for the customers.

Mr Mjwara explained that in the future, there would be no VANS. Everybody would be free to apply for a network licence. For those who would not want to take this route, there would be leasing stipulations on how it would be managed. The Bill provided substantially with respect to leasing someone else’s facilities. Thus this issue had been dealt with.

Ms Smuts was pleased about Mr Mjwara’s clarity on the issue. It implied, however, that Members had to redraft Clause 5(4). Many people had misunderstood that clause. Mr Mjwara added that they also had to clarify the conditions for individual and class licences.

Mr Gore remarked that the main challenge for the Committee was to foster the access of the vast majority of the population to new technologies. An increasingly competitive environment would be one way to achieve this goal. Thus far the level of competition had been low in most areas. Where there had been competition they had encountered substantial cost reduction. The fundamental problem was the lack of competition in the call network. There were no incentives for rollout in the rural areas. Regarding this matter, the issue of interconnection had to be looked into.

Mr Khumalo asked Nashua Mobile and MWeb how they would ensure that access to telecommunication systems was granted to women, disabled people and the youth. He further queried their position regarding Black Economic Empowerment and for information on their gendered approach.

Mr Taylor replied that Nashua Mobile currently employed 48 people that had never been employed or trained in the call centre environment before. Nashua Mobile was following the regulations outlined in the ICT Charter. They had big programmes in place.

Mr Heath added that MWeb was part of the ICT Charter process. They were rolling out various services to schools. MWeb had a number of initiatives. Call centres had become a regular source of employment for disabled people.

The Chairperson said that all the hearings should have been completed by the following Thursday, and a discussion with the Department would take place on 25 August.

The meeting was adjourned.