Telkom’s Monopoly

Meeting report

LABOUR AND PUBLIC ENTERPRISES SELECT COMMITTEE
20 June 2000
TELKOM’S MONOPOLY

Documents handed out:
Request for proposal: Formulation of Policy Directions For the South African Telecommunications Post-Exclusivity Period (See Appendix 1)

SUMMARY
The Director General of the Department of Communications informed the committee that Telkom’s five-year exclusivity expires 7 May 2002, and the debate in the media regarding Telkom’s delivery of unaffordable services is out of context. He emphasised that the exclusivity period of Telkom should be seen in terms of its obligations to roll out services to previously neglected communities. Telkom feels that they are delivering affordable services and the Department is satisfied with Telkom’s performance.

MINUTES
Telkom’s monopoly
Director-General of Communications, Mr Andile Ngcaba, stated that Telkom’s exclusivity expires 7 May 2002. He informed the committee that the debate in the media regarding Telkom’s delivery of unaffordable services is out of context. [A survey had shown that national call charges are the most expensive of 13 other countries that were surveyed by international utility cost analyst, NUS]. He said that they should look at the history and the big picture as regard the development of infrastructure and service delivery of telecommunications in South Africa. The Telecommunications Act 103 of 1996 states that Telkom should offer affordable services and Telkom and feels that they are delivering affordable services.

Mr Ngcaba briefed the committee about the history of Telkom before 1994. Previously, Post Office and Telkom were a single entity. In October 1991, the legislation was amended to create Telkom SA Ltd and SA Post Office Ltd. In 1993, two cellular operator competitors, namely MTN and Vodacom, were introduced.

The 1996 Telecommunications Act was designed to develop the telecom infrastructure, and reposition the company for local and global competition. South Africa felt the need to inject foreign investors, and passed a law to sell 30% of Telkom. Part of the proceeds of this sale was used to reduce state debt.

In February 1997, the independent regulator called SATRA was established. Telkom was then given a five year exclusivity in the fixed line market in exchange for assisting with capacity building targets such as the role-out of 2.8 million lines, of which 1.7 million were earmarked for historically under serviced areas and priority customers such as clinics, schools and hospitals, and an additional 120 thousand public pay phones. Mr Ngcaba said that Telkom has invested R42b, and emphasised that exclusivity should be seen in terms of obligations, and not in isolation.

Mr Ngcaba concluded by informing the committee that the post 2007 environment would be characterised by full competition and liberalisation in the telecommunications market with a teledensity of at least 30%.

Discussion
Mr Z Kolweni (ANC) asked why Telkom still has the right to exercise exclusivity.

Mr A Ngcaba said that this debate should be looked at in context. They should consider the circumstances at the start of this exclusivity period. Now that there are many potential competitors, the media is instigating this debate. Land telephones still need to be delivered to rural areas. Telekoms are obliged with the responsibility of development, especially in the rural areas. The debate should be focused on the market structure beyond the exclusivity period. This market must be planned, because it is capital intensive.

The Chairperson noted that in terms of Schedule B of the Regulations relating to the Telecommunications Act 103 of 1996, Telkom has to deliver services in terms of strict requirements. He asked if Telkom has met these requirements?

Mr Ngcaba said the Department is satisfied with the delivery by Telkom, because they have reached their targets, and are still delivering.

Mr Fenyane asked if the new operators would be allowed to use the infrastructure that has already been put in place by Telkom.

Mr Ngcaba replied that none of the new competitors would be allowed to use the infrastructure that has been put in place by Telkom. They are introducing infrastructure competition which implies that they have to develop their own infrastructure.

Mr L Lever (DP) asked if Telkom would still have social obligations after the exclusivity period. Would Telkom be given an extension of exclusivity after the expiry date?

Mr Ngcaba replied that Telkom will not be given an extension of their exclusivity period, as this period expires in terms of the licensing regime. Telkom will have to continue delivering in terms of their social obligations.

Mr Kolweni (ANC) asked what the situation is regarding the infrastructure that was washed away by the recent floods.

Mr Ngcaba commented that the biggest enemy of infrastructure is floods and rain. The rain is problematic because the cables have to dry.

The Chairperson asked if the new competitors would have to comply with certain requirements in order to operate.

Mr Ngcaba said the new competitors would have to comply with the responsibilities and obligations in terms of the licence agreement.

Dr Nel (NNP) asked if partnerships could be developed between fixed and mobile telephones, after the exclusivity period.

Mr Ngcaba said that in the near future, there would be no distinction between fixed and mobile telephony. Mobile and fixed telephony is converging. In this country, there are more mobile telephones than fixed telephones.

UK Study tour
The chairperson informed the committee that the proposed UK study tour in July is dependent on the response from the chairperson in the Portfolio Committee on Public Enterprises. This planned tour to the Defence Diversity Agency (DDA), which is the equivalent to South Africa’s Defence Evaluation and Research Agency (DERA), will be useful to the MPs because South Africa plans to restructure State-owned enterprises. If the Portfolio Committee does not respond in time, this trip might be postponed, or even cancelled. The chairperson said that members participating in the UK trip will be informed of future developments.

Appendix 1

DEPARTMENT OF COMMUNICATIONS
REQUEST FOR PROPOSAL
FORMULATION OF POLICY DIRECTIONS FOR THE SOUTH AFRICAN
TELECOMMUNICATIONS POST-EXCLUSIVITY PERIOD:

TERMS OF REFERENCE FOR ADVISORY SERVICES

Introduction
The Department of Communications requires the services of an advisor to draft policy directions outlined in this terms of reference.  The Telecommunications Act 103 of 1996 codifies the necessary process of consultation that needs to be undertaken.

Vision
"The vision of the Department is to improve the quality of life of all our people, make South Africa's future generations a knowledge-based society and help create an information economy.  This will be achieved by establishing a networked information community to empower the way people work, live and play and make South Africa globally competitive."

Mission
"The Department aims to strive towards universal service to enable ordinary people to have access not only to traditional media but also the convenience of information technology.  These will include services that will create a flourishing information society such as tele-medicine, tele-education and other convenience measures that will improve the way people work, live and play, while contributing to the economic growth of our country."

Objectives of the Telecommunications Act 103 of 1996
The primary object of this Act is to provide for the regulation and control of telecommunication matters in the public interest, and for that purpose to-

1.Promote the universal and affordable provision of telecommunication services;
2.Promote the provision of a wide range of telecommunication services in the interest of the economic growth and development of the Republic;
3.Make progress towards the universal provision of telecommunication services;
4.Encourage investment and innovation in the telecommunications industry;
5.Encourage the development of a competitive and effective telecommunications manufacturing and supply sector;
6.Promote the development of telecommunication services which are responsive to the needs of users and consumers;
7.Ensure that, in relation to the provision of telecommunication services, the needs of the local communities and areas are duly taken into account;
8.Ensure that the needs of disabled persons are taken into account in the provision of telecommunication services;
9.Ensure compliance with accepted technical standards in the provision and development of telecommunication services;
10.Ensure fair competition within the telecommunications industry;
11.Promote the stability of the telecommunications industry;
12.Encourage ownership and control of telecommunication services by persons from historically disadvantaged groups;
13.Protect the interests of telecommunications users and consumers;
14.Encourage the development of human resources in the telecommunications industry;
15.Promote small, medium and micro-enterprises within the telecommunications industry;
16.Ensure efficient use of the radio frequency spectrum;
17.Promote the empowerment and advancement of women in the telecommunications industry.

Telecommunications Reform: Pre 1994
The Telecommunications sector has been characterised by an ongoing process of reform and transformation. The most significant pre 1994 period was characterised by the separation of the traditionally combined Posts and Telecommunications services. Two corporatised companies were created namely Telkom SA Ltd. to provide telecommunication services and the SA Post Office Ltd. to provide postal and savings bank services. (Post Office Amendment Act, (1991)). In 1993 competition was introduced in the mobile segment with the licencing of two cellular operators, namely MTN and Vodacom (September 1993). Establishment of Centre for Development of Telecommunications Policy (CDITP) and National Telecommunications Forum (NTF)
Telecommunications Reform: Phase I (1996 – 2002)
The first phase of the Telecommunications reform post 1994 was designed to extend services; upgrade and modernise the telecommunication infrastructure of the nation and reposition the company for local and global competition. This phase was characterised by the following key features:
-NTPP & TTT draw up Green Paper (1994/95)
-Green Paper – Launch to closing date
-Industry briefing on responses to GP
-National Colloquium on Telecoms Policy
-Final debate on unresolved issues at NTF
-White Paper published & launched
-Telecommunications Bill in Parliament
-Telecommunications Act (No. 103 of 1996)
-the Act institutionalised a three-tier separation of policy, regulatory and operational functions; and
-established amongst other things a new regulatory regime for the sector (SATRA & the USA)
-issued a 25 year licence to Telkom providing for a 5-year exclusivity on the PSTN segment of the Telecommunications market
-the part privatisation of Telkom with the sale of 30% equity to the SEP consortium Thintana for US$ 1,261bn – part of which was used to reduce State debt
-a period of exclusivity in the fixed line (PSTN) segment of the telecommunications market (5-6years) in exchange for extended and enhanced service delivery; infrastructure rehabilitation and modernisation; technology development, skills transfer and HRD and related capacity building targets
-roll-out of 2,8 million lines of which 1,7 million were earmarked for historically under serviced areas and priority customers such as  clinics, schools and hospitals, and an additional 120 thousand public pay phones
-the five-year capital expenditure commitment of R48 billion for the modernisation, expansion and rehabilitation of the network
-liberalisation and increased competition in various value added segments of the market; and
-The first phase of the telecommunications reform initiative not only achieved several sectoral objectives but also dovetailed with government’s macro-economic strategy to transform and expand the economy, eliminate the apartheid legacy and ensure a sustainable improvement in the quality of life for its citizens.

Telecommunications Reform: Phase II (2002 – 2007)
Telkom’s period of exclusivity is about to end in May  2002 and the DoC has begun to review the policy, legal and regulatory arrangements within the communications sector with one of the key objectives being to create a more favourable environment for competition and to ensure that the SNO is licenced by May 2001 and operational in May 2002. Other key objectives for Phase II include:
new FDI in the sector
further modernisation and extension of the infrastructure
further increase the access and service (by both fixed and mobile) to at least 25 – 30% by 2007
enhance skill and knowledge, particularly in historically disadvantaged communities
foster and encourage the development of a robust and vibrant e-commerce environment
prepare institutions and citizens for the information society
build critical information infrastructure
encourage black economic empowerment
establish Internet II (school network through DocWIL’s)
prepare the regulatory environment for convergence (ICASA – merger of IBA & SATRA)
The SNO and IPO initiatives currently underway consequently constitutes two separate but related elements of phase two of the telecommunications reform strategy, which government institutionalised with the Telecommunications Act 103 of 1996.
Amongst other things, a critical element of phase II of the telecommunications reform process, government needs to ensure a macro as well as sectoral framework which creates confidence for new entrants and investors, both in respect of the SNO and the imminent Telkom IPO.
Ensuring confidence and encouraging further domestic and foreign investment in the sector is contingent on a number of issues – not least:
an integrated and coherent macro–economic policy framework; with related market friendly and good governance institutional arrangements
an integrated and coherent policy and legal framework for the communications  sector; especially with the era of convergence; the information age and related information society and e-commerce developments; and
ensure a coherent; strong, stable and credible regulatory regime for the sector
Convergence of technologies and services with the ICT sector and related issues of globalisation create policy complexities for both developing as well as developed economies.  A key challenge for South is how to extend the infrastructure and services to historically disadvantaged communities (USO) while simultaneously attracting the necessary financial investment and know how required to upgrade and modernise the telecommunications infrastructure and thus position South African companies for local and global competitiveness, within this era of convergence.

Telecommunications Reform: Phase III (2006 – beyond)
The post 2007 environment would probably be characterised by full competition and liberalisation in the telecommunications market with a teledensity rate of at least 30%. Other key features would include:
Internet economy
Mobile information society
Knowledge society
Internet II
Full blown e-commerce

As part of its work the Department will consider further the circumstances where telecommunications policy will be appropriate. This work would also consider the basis on which to resolve tensions between policy principles and how these will be applied in the light of market developments such as:

1.Globalisation of reach of telecommunications suppliers serving multinational companies;
2.Integration between fixed and mobile markets;
3.Convergence of IT, telecommunications and broadcasting;
4.New methods of pricing new services;
5.Increased demand for access to local loops by competitors seeking to provide new services;
6.Effective development of a cable infrastructure network;
7.New Players

The telecommunications sector is characterised increasingly by liberalisation, new technologies and cross-border capital flows, among many other considerations. The sector is witnessing merger and acquisition activity on an unprecedented scale.

This has been accompanied by increased pressure on the structuring of markets. Direct foreign investment in telecommunications and related sectors is an important policy area where there are strong pressures for the relaxation of regulation in order to promote market access. Whilst acknowledging the critical importance of the development applications of the promises of the information society, it has been equally important to understand and prepare for the market forces at work. Developments at the World Trade   Organisation and similar multilateral and bilateral fora require an active approach from policy makers.

The Policy Process
The rapid pace of change means that policies need to be responsive to the various changes in the telecommunications sector. Policy-making has become a dynamic process, to take into account liberalisation, cross-border flows of investments, competition and the extension of universal service, among other factors.

Among the policy objectives set out in the 1996 Telecommunications Act, is the promotion of fair competition within the telecommunications industry.  The transition from a market dominated by an incumbent monopoly to one that is characterised by effective competition providing customers with a real choice is embodied in the regulatory framework.  It is against this background that the Department of Communications is responsible for advising the Minister on policy matters and the regulator has day to day responsibility as the regulatory watchdog and enforcer of the statute.  Thus, the Department is responsible for preparing the necessary technical policy options on the nature of the competition to be introduced after the exclusivity period – for example, duopoly, oligopoly, service based or facilities based competition – and the regulator is responsible for issuing licences, monitoring compliance, empowerment and rectifying non-compliance.

The Department of Communications wishes to appoint a suitable Advisor to assist with the formulation of the sector policy and strategy for the post-exclusivity period of Telkom. The aim is to maximise the value of the sector taking into account all relevant factors.

1.Construct meaningful scenarios to assist the decision process;
2.Make recommendations on competition policy;
3.Make recommendations on issuing Invitation(s) to license additional operator(s) and propose the draft Invitation(s)/RFP accordingly;
4.Draft the necessary amendments to the 1996 Telecommunications Act;
5.Assist with oral and/or written question and answer requirements as may be required of any public process;
6.Undertake the necessary clarification session, question & answer -session pursuant to the issue of the Invitation;
7.Draft the necessary memoranda and correspondence in connection with matters to be discussed with the regulator;

The Advisor shall report to the Project Manager of the Department and shall renew existing studies, where available, and draft the following policy directions:

1.Convergence Policy
-Review existing work and draft policy direction
-Background information available

2.Signal Distribution Policy
-Review existing work and draft policy direction
-Background information available

3.The Internet Policy
-Need detailed policy direction

4.E-Commerce Policy
-Existing process of Green Paper and White Paper

5.Post-Exclusivity Telecommunications Competition Policy
-Post exclusivity
-Need policy direction

6.Telkom Licence
-(Icasa to amend)
-Indicate what areas to amend

7.New Licences for MTN and Vodacom
-Indicate what areas to amend

8.Infrastructure Sharing and Leasing
-Need policy direction

9.Market Segmentation and Unbundling
-Need policy direction

10.Third Generation Policy(Third Generation Sysytems)


11.Satellite policy

12.GMPCS
-Review existing policy

13.Virtual Private Networks

14.Wholesale and Resale

15.Foreign Ownership

16.Black Economic Empowerment:  A Discussion document out is already in circulation for discussion. The document entails issues pertaining to:
Set-aside
17.Ownership
18.Participation
-job creation

19.The SMME Policy

20.Telecommunications Manufacturing - Local content and value added procurement - equipment manufacturing

21.Technology and Standards issues : (Conditional Access)

22.Wireless in the Local Loop (WLL)

23.Broadband Networks ATM, ADSL

24.Human Resources Development Strategy

25.Telecommunications and Gender
Policy direction

26.Disability and Technology

27.Spectrum Policy
-Need a policy direction
-% of license fees should go to the institution (High-tech) +Spectrum Directorate

28.Numbering Policy
-Work in progress

29.Rural Communications

30.Service Delivery Policy

31.E-Rate

32.Emergency Communications



33.Call-Back

34.Interception and Monitoring Prohibition

35.Universal Access

36.Priority Customers
-Schools
-Clinics
-Hospitals
-Villages
-Public Office
-Police stations
-Libraries
-MPCC
-Telecentres

37.Pricing and Tariffs

38.Directories

39.Consumer Protection and Privacy

40.Broadband Wireless Local Loop, Video Networks in Motorways and CBDs

41.Networking

42.Up-linking and Down-linking

43.V-SAT (Defined as a service not just as technology and equipment.)

45.Cable Networks

46.International infrastructure

Process & Time-table
It is envisaged this assignment would be completed in three months.

Your firm is hereby invited to submit a proposal, consisting of approximately twenty (20) pages in total. Five (5) copies (1 additional unbound copy) are to be delivered no later than 11h00 of the closing date [                 ].

In accordance with this RFP, proposals should set out the credentials of the firm, expertise and experience, a thorough understanding of the issues pertaining to the process, your approach to the assignment, demonstration of how your firm would implement the process within the timeframe and, in any event, as may be required of the deadlines pertaining to the liberalisation timetable already in force and your proposed fee, among other matters considered important.

The Department of Communications shall evaluate all proposals and shortlist three firms who achieve the highest score as set out in the Phase 1 selection criteria.  These three firms will then be invited to an interview where they will be evaluated according to the Phase 2 selection criteria (Annexure 1 sets out the selection criteria).

The interview shall consist of a maximum of a 30-minute presentation by the invited firm, followed by a Q & A session.  The presenting team shall consist of no more than 5 persons, strictly that complement of the proposed team that will be engaged in the assignment.

The Department of Communication reserves the right to appoint a firm of its choice or no firm at all, at its sole discretion.

Tenders must comply with the conditions of the State Tender Board.  International firms are required to forward their submission through a local South African agent.

Contact Person
The Administration Officer: Telecommunications Policy

ANNEXURE 1

Selection Criteria

                                                                        TOTAL                            100%

                                                                        TOTAL                             100%