Big bucks for minor licences
The big guns of South African telecoms may fear to tread in the country`s pitifully poor rural parts, but would-be operators are lining up in droves. Those who succeed in winning any of the ten underserviced area licences earmarked initially will need pots of money – “big bucks”, to quote a councillor from the industry regulator. Between R15 million and R500 million, each, is what some analysts estimate they`ll need, depending on how ambitious their roll-out plans are.If all goes according to schedule – which can be a sensitive point in the South African telecoms scene – local operators will be up and running in ten rural districts by the middle of 2003.Armed with licences that will allow them to provide a full range of telecoms services and interconnect with the established players` networks, these operators will venture into rural backwaters like Ugu in KwaZulu-Natal where some residents still have to walk ten kilometres to reach a phone.Last in the queue for connectivity, these districts have been singled out for the first phase of a grander plan that will eventually cover 29 rural districts, all of them with under five fixed lines for every 100 people.Or so the Department of Communications claims. Telkom wants to know how it reached that conclusion in eight of the 29 districts, including at least one of the ten now on the table. Some of the cellular operators, on the other hand, seem surprised that mobile has been left out of the teledensity equation altogether.But teledensity is only one of a host of issues bubbling to the surface as the licensing process grinds into gear. Probably highest of all on the agenda is funding, timetables and the economic viability of the licences.“These are big licences and you`re going to need big bucks for this,” said Independent Communications Authority of SA (Icasa) councillor Mbulelo Ncetezo at a mid-August briefing held to announce the process and timetable for the issuing of the ten licences. He was responding to pleas from some licence hopefuls in the audience – some of whom had travelled to Gauteng from Durban, Sasolburg and Welkom to attend the one-and-a-half hour briefing – for Icasa`s help in getting funding agencies on board. “There is no way we`re going to compete with Telkom with our bare hands,” said Padi Mokodutlo from the Northern Free State consortium.But Ncetezo made it clear that funding isn`t Icasa`s territory. “We do understand your concerns, but we are the regulator,” he said. “Financing is a big part of this but we are the people who will be adjudicating your proposal. Issues such as funding and business plans are not within our jurisdiction. For that, you should be talking to the government.”Nor was Ncetezo prepared to give an estimate of just how much funding would-be operators might need. “Maybe the guys who say they`ve been working on this since last December can tell you,” he told a journalist, referring to claims by other consortia that they already had all their ducks in a row and were pushing to speed up the licensing timetable. Pick a numberForecasts vary widely among those who are prepared to stick out their necks and estimate potential network roll-out costs.The Department of Communications` deputy director-general Phakamile Pongwane reckons that the operators could invest R1 million to R30 million to set up their networks. Forge Ahead BMI-T, which has created a programme to educate communities and support applicants with their bid preparations, puts the figure at between R80 million and R100 million. The Canadian-funded International Development Research Centre (IDRC) estimates the barest minimum a new player would need in the first year is R15 million – R5 million for the sketchiest network build-out, R5 million for operating costs and roughly another R5 million for operating and business support systems. Players with more ambitious roll-out plans could spend anything up to R500 million.By all accounts, whoever ends up winning the licences is more likely to be on the small side.The Telecommunications Amendment Act – the “bible” of the industry – specifically says the licences for underserviced areas are intended for “small business”.What`s more, the criteria Icasa proposes using in evaluating licence applications clearly favour bidders with strong participation by local communities, particularly women, the youth and people with disabilities. In fact, ownership will carry a 20 percent weighting in the adjudication process, more even than technical or financial expertise.ICASA has also drafted regulations that should limit the likelihood of a de facto national operator emerging. Only one licence is to be granted for each district, and no player may hold a controlling interest in more than one licence. Entirely precluded from bidding are any of the major licence-holders – Telkom, Vodacom, MTN, Cell C, Sentech and the SNO – although they will not be barred from operating in any of the 10 districts. Some answers neededThe ownership issue raises a veritable flood of questions: Who out there has the kind of money to provide financing to small operators? Would they be willing to lend it for rural services and, if so, on what terms? Probably most pertinent of all, would it be worth their while – do the underserviced area licences represent a sufficiently attractive business case?“Telecoms is big business, not small business,” says Heloise Emdon, a telecoms analyst with the International Development and Research Centre (IDRC), a Canadian agency currently researching underserviced area licences. “In this equation, it is also a very high-risk business that depends on access to capital and economies of scale. If you limit involvement in the licences to small players, you limit their access to capital. Yes, entrepreneurs should be part of this but they should be allowed to team up with bigger partners – equity partners with some real money. We can only hope that the final regulations on ownership will be flexible enough to allow this.”The final regulations, which will cover ownership, interconnection and facilities-leasing, are due to be published at the end of October, after all and sundry have had a chance to study the draft regulations and to take part in public hearings. Spare any change, gov?Financing, says Emdon, is the “weak link” in the government`s plan to launch underserviced operators. “If this is only for small players, you definitely have to provide a committed funding-enabling mechanism,” she says, citing as an example the low-interest loan guarantees granted by the US government in the 1920s to farming cooperatives to run their own electrification and telecoms networks.“Here in SA, nothing of that sort has accompanied the policy,” says Emdon, who is alarmed at the apparent lack of coordination with various development finance institutions, who have the resources that could be mobilised for underserviced area operators.Potential applicants, who will also have to pay R15 000 each to apply for the licences, have been told they can go knocking at the doors of the likes of Khula Enterprises, which supports guaranteed loans of up to R1 million for small businesses (far from sufficient), or the Industrial Development Corporation and the Development Bank of Southern Africa (DBSA), which, thankfully, fund much bigger projects. “There seems to be a lack of communication between policy-makers and financiers,” says Emdon.She adds that the IDRC and the DBSA are jointly funding research into the business cases of these small operators, hoping to get a cashflow model that will help the DBSA appraise their viability in order to fund the licensees. They will be running a workshop for potential bidders after the regulations have been finalised and before the bidding process closes, and hope to invite the incumbents and technology providers for matchmaking and business planning.Simon White, joint MD of Forge Ahead BMI-T, believes the licence plans are an “incredible opportunity” for local communities and entrepreneurs, but he`s frustrated by what he sees as the lack of initiative by funding agencies in coming to the party. Which is one reason why White, who calls himself an “entrepreneurial activist”, has been on a countrywide crusade, visiting towns from Umtata to Mmabatho to mobilise communities to form broad-based bidding consortia.Part of the message he`s getting across is that bidders will also have to dig into their own pockets for funding. “If you put together all the R5 coins that individuals can contribute, it could go quite some way towards resolving the funding barrier.”One source of funding support that does seem to be more or less in the bag, though, is the Universal Service Fund, managed by the Universal Service Agency which has joined Forge Ahead on its rural road shows to spread the word about the upcoming licences.The Universal Service Agency, which was set up in 1997 to boost access to telecoms in SA`s underserviced areas, was previously limited to about R20 million a year available in the fund. The fund`s coffers are now set to swell substantially, with between R150 million and R250 million a year coming in through compulsory payments from the major operators.At least some of this money is being earmarked to assist operators to set up shop – but certainly not all of it. In all, the Universal Service Agency has seven mandates related to improving access, and assisting underserviced operators is only one of them.Meanwhile, the agency says it is strongly in favour of local, community-based operators winning the licences. “If we want this to work, communities themselves must be as involved as possible,” says CEO Dipuo Mvelase. “It is community buy-in that will give the new players an edge over incumbent operators.“One of my biggest fears is that the participation of big companies with big resources could lead to short-cuts in empowerment and to money leaving communities themselves,” Mvelase adds. “For real empowerment to happen, communities have to learn their own lessons and carry some risk themselves. For me, that`s also the most exciting part.” Rural roll-out: The risks and rewardsThe viability of setting up networks in rural backwaters is a concern raised by virtually all industry-watchers. First of all, the ten districts we`re talking about are among the poorest in the country. Second, as many observers are quick to point out, if a big player like Telkom couldn`t cut it in the rural areas, why should anyone else think they could?Telkom`s recent roll-out record is frequently held up as an example of why rural roll-out is risky. After all, of the 1.7 million lines it installed in underserviced areas during its five-year exclusivity period, only a quarter or so are still active.“Did we fail? No, the network is there but the customers are not,” says Victor Moche, Telkom`s group executive for regulatory and government relations. “Customers are a function of the economy in general. If the economy is banging away happily, if there are jobs and household income, you`ll get customers. The fundamental problem we`re facing is poverty. But the fact that people can`t afford to pay doesn`t mean the need for services isn`t there.”Moche says it`s “just fine” that Telkom is excluded from bidding for the licences, but that the company would be “very happy” to cooperate with the new players on interconnect and facilities leasing – as long as the licensees are community-based small businesses and the relationship is run on business principles.“The intention of these licences is to stimulate teledensity and economic activity by involving small business in the sector,” says Moche. “That`s how the policy was conceived. And there are also advantages to being small. If SMMEs are efficient and keep their overheads low, they should be able to deliver services at lower prices. But if there is an attempt to create fat national operators, we would have a problem.”He adds: “We borrowed money to build our network and we`re still sitting with that debt. If people want to come in and access our network as paying customers, that`s fine, that`s business. What wouldn`t work is if the administrators came in and said, Telkom must give one, two, three.”As Gabriele Celli, Telkom`s regulatory executive, points out, Telkom is already subject to hefty telecoms taxes, including annual licence fees (1 percent of its annual revenues on public switched telecoms services), payments to the Universal Service Fund, as well as spectrum fees and duties on imported equipment. “We are paying already and we haven`t objected to that,” says Celli. More demands, though, would be hard for the company to swallow. Complementing, Not competingMoche says Telkom doesn`t see the new players as potential competitors. “They are being licensed precisely because Telkom is not active in these areas, so they`ll be complementing us, not competing with us or with anyone else. They will be generating new customers, not trying to take away Telkom`s customers.”That`s not necessarily the view of some licence hopefuls, like Zuki Munyai of the Bokone Consortium in the Capricorn district, which covers five municipalities, including the metropolis of Pietersburg.If Munyai`s consortium wins the Capricorn licence, there`s nothing stopping it from actively lobbying for the telecoms spend of businesses in the area, she says. “It`s important to know your opposition`s weaknesses and I have seen many businesses that are not happy about what Telkom has been doing for them,” says Munyai. “I can go to them today and it is up to them to choose between us and Telkom. All we need to do is be innovative and do things better than Telkom has been doing.”Capricorn is one of the districts whose five percent teledensity rating Telkom is querying, according to Munyai.Meanwhile, other potential bidders have mixed views on whether or not they`ll be competing with or complementing the incumbents, cellular and fixed. Says Ndumiso Nyubuse of the Eastern Cape: “We don`t see ourselves as being a potential competitor to any existing company, because there is such a lack of infrastructure. But that strategy could change over time.”Another consortium, Durban-based NATel, is adamant the incumbents shouldn`t see the new players as a threat. What worries NATel, though, is that the awarding of the new licences could spark off a sudden flurry of roll-out activity by existing operators. “It could be a wake-up call for them,” says Kuban Naidoo, whose fears were echoed by a number of other would-be bidders attending the ICASA briefing.Telkom, for one, disagrees. “Our priority is to take down our debt load and to make our current infrastructure sweat,” says Moche. “Now that our roll-out obligations have been completed, our strategy is to expand only where revenue is available, where it makes business sense to expand.” Low-hanging fruitVodacom, which declined to be interviewed for this article, is keeping totally mum on the subject of the underserviced licences. Cell C, though, thinks operators catering for underserviced areas should focus on the one segment of the market where there`s proven demand in rural areas: public telephones.“There`s a proven business case and proven market demand in rural areas for public phones – and the entry costs are low,” says Cell C`s regulatory chief Karabo Motlana.“But services like residential phones and the Internet? The capital costs would be too much of a burden, as Telkom`s experience has shown. And remember, this isn`t just about rolling out infrastructure. Providing a full service means exactly that: accurate and timely billing, carrier-grade engineering support, as well as maintenance ... there are major running costs to take care of.”So Cell C`s view, says Motlana, is that underserviced area licensees should target the “low-hanging fruit” of the payphone market, keeping their costs down by enlisting an established operator to help them roll out payphone lines and provide billing platforms and customer support. Cell C, he says, would be more than willing to offer its services (“but it could just as well be any other operator”) if this contribution were used to offset the operator`s own rural roll-out obligations. In Cell C`s case, these amount to rolling out 52 000 community payphones over the next seven years.Forge Ahead`s White disagrees that public payphones are the only viable option for new entrants. “If the licen-sees can persuade business and municipalities to come on board as customers, they could find a lucrative market for a full range of services,” he says. “It will also be important to get white business, including farmers, to buy into the process. The broader the level of involvement, the greater the chances of turning the government`s good intentions into practical, sustainable reality.” Municipalities add meatMunicipalities, believes White, could well be the key to the viability question, possibly by taking a small equity interest in bidding consortia, but definitely as supporters of the process and as potential customers.Are the municipalities biting? Some are certainly taking an active interest in drumming up awareness of the licences among communities and helping to coordinate the forming of consortia.The OR Tambo District Municipality in the Eastern Cape says it won`t be bidding directly for the district`s licence, but it is coordinating the formation of a bidding consortium that will consist of young people, women, the physically challenged, businesses and retrenched Telkom workers.“As government institutions, the district and local municipalities cannot bid directly for the licence but will assist the consortium with the payment of registration fees and so on,” says a district municipality spokesman. “From our experience, projects of which the community has a sense of ownership are more sustainable.”Another district municipality throwing its weight behind the licensing plans is Ugu in KwaZulu-Natal. Like OR Tambo, this district municipality has no plans to participate in a bid but has appointed a “champion”, the local economic development manager, Thulani Bengu, to raise community awareness and support potential bidders.Indications are that more than one consortium may contend for this district`s licence and, if so, the district municipality will not be playing favourites. “Our focus is on good infrastructure and affordable rates,” says Bengu. “We will not have influence over who will be chosen and we give information equally to whoever is interested.”As to whether the district municipality would consider becoming a customer of the new player, Bengu says: “We have no problem with the present service provider but, where it makes business and economic sense, we would consider it. The councillors will want service that is more efficient and cheaper.”He adds: “Because we are involved in water supply, we know what people can afford. What won`t work here is the approach of cutting people off if they can`t pay the connection fee. One of the biggest needs here is for incoming calls from outside the district, which will also benefit the operators.” Behind the scenesWhile communities get mobilised, consortia take shape and Icasa sorts out the regulations, a range of technology companies, while not yet committing themselves, are scouting the landscape for emerging opportunities. Those that have sent representatives along to some of Forge Ahead`s rural road shows include SAP and Ericsson, while companies like Comparex, Grintek and Nortel are also watching developments eagerly.“This would have to be done very differently,” says Grintek Telecom`s executive sales manager Srini Moodley. “For one thing, government will have to make this as viable as possible for SMMEs by giving them special concessions, whether in terms of tariffs or interconnect. For another, to keep investment costs down, we should be looking at leveraging existing infrastructure, both fixed and mobile. The core is there, we need to tap into that.”Moodley also feels it would be wiser to take the time to thrash out the most viable model, “even if it takes a little longer”.Not everyone, though, shares that sentiment. At the Icasa briefing on the licensing timeframes, councillors braved uproar from some licence hopefuls agitating for the timetable to be accelerated.Unmoved by Icasa`s insistence that there`s a process to be followed, regulations to be issued, public hearings to be held and so on, some in the audience persisted. Typical comments heard were: “We have done our work, we are ready, let`s shorten the timetable and move with this.” Others said: “We are incurring costs, we started planning 12 months ago. Your timeframes may kill some consortia.”Icasa stood its ground. “You`re assuming you`re going to win,” said Ncetezo. “You might not win. If we shorten the application time, your application might not satisfy us. Why don`t you give yourself time? Have you got your business plan ready? Do you know exactly what you`re getting into?” Time will tell.
02 September 2002
The big guns of South African telecoms may fear to tread in the country`s pitifully poor rural parts, but would-be operators are lining up in droves. Those who succeed in winning any of the ten underserviced area licences earmarked initially will need pots of money – “big bucks”, to quote a councillor from the industry regulator. Between R15 million and R500 million, each, is what some analysts estimate they`ll need, depending on how ambitious their roll-out plans are.
Armed with licences that will allow them to provide a full range of telecoms services and interconnect with the established players` networks, these operators will venture into rural backwaters like Ugu in KwaZulu-Natal where some residents still have to walk ten kilometres to reach a phone.
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