Diálogo Regional sobre Sociedad de la InformaciónThe Role of the State The Role of the State

in Broadband in Broadband DevelopmentDevelopment

Alison GillwaldExecutive Director Research ICT Africa &

Adjunct Professor University of Cape Town,

Graduate School of Business,

Management of Infrastructure Reform and Regulation Programme.

DIRSI Young Scholars Programme DIRSI Young Scholars Programme Lima 18 May 2011Lima 18 May 2011

Research ICT Africa

ICT policy and regulatory think tank based in Cape Town South Africa that hosts a 20 African network across the continent conducting research in the absence of data and analysis required for evidence based policy

Policy research based on series of supply and demand side research undertaken by 20 country African research network which is triangulated with a telecommunications regulatory environment survey

Outline

Role of broadband in growth

Role of State – political

economy of reform

Global benchmarking

Policy responses in Africa

Analysis Absence of policy/vision

Lack of co-ordination

(cross cutting nature of

ICTs)

Institutional arrangements

Market structure – Vertical

integration/

concentration/ownership

Licensing - ahead and

behind

Absence of

vision/strategy/ demand

stimulation

South African case

Recommendations

ICTs and MDGs

“Broadband is the next tipping point, the next truly transformational technology. It can generate jobs, drive growth and productivity, and underpin long-term economic competitiveness. It is also the most powerful tool we have at our disposal in our race to meet the Millennium Development Goals, which are now just five years away.”

Hamadoun Touré, Secretary General

International Telecommunications Union.

Kenny & Kenny (2011) critique decontextualised, generalised claims of benefits of different types of broadband at different speeds for different audience segments (business vs. residential)

Telecom investment & economic growth

Correlations between telecom penetration and growth, job creation and productivity

Causality? Network effects World Bank 2010 study - 10% increase

in broadband penetration accelerates economic growth by 1.38% point in developing countries, more than in developed economies.

Kenny & Kenny (2011) critique decontextualised, generalised claims of benefits of different types of broadband at different speeds for different audience segments (business vs. residential) as justifications for subsidies.

2004 2005 2006 2007 2008

South Africa 5,17 6,38 7,43 .. ..

Senegal 6,84 7,81 8,96 9,75 ..

Brazil 3,37 4,15 4,62 4,61 ..

China 3,30 3,19 3,06 2,88 ..

India 2,28 2,42 2,02 .. ..

Kenya 4,34 4,74 4,05 6,05 6,32

Turkey 2,78 2,60 2,27 2,51 2,27

Tunisia 4,08 4,28 4,17 4,20 4,33

Korea, Rep. 4,62 4,67 4,70 4,65 4,72

Telecommunications revenue as % of GDP

Source: World Bank, IC4D database 2010

ITU Broadband Commission Report 2010

ITU Broadband Commission Report 2010

Average retail price for basic broadband in Sub-Saharan Africa $366 p/m vs. $40 in Europe (and India)

(Mark Williams (2008) Broadband for Africa, infoDev)    Per 100 inhabitants Mobile broadband subscriptions

2005 2006 2007 2008 2009 2010

Africa - 0.1 0.3 1.0 3.0 3.6*

Arab States 0.1 0.2 0.8 3.3 6.2 9.7*

Asia & Pacific 1.2 2.3 3.4 4.5 5.7 7.1*

CIS - - 0.7 1.8 19.5 25.9*

Europe 3.9 9.0 17.8 25.9 35.3 46.3*

The Americas 0.4 1.4 6.2 10.3 16.4 24.2*

Estimated Internet users  Africa 2.2 3.0 3.6 5.9 8.8 9.6*

Arab States 8.0 10.6 13.8 16.9 20.5 24.9*

Asia & Pacific 9.5 10.7 13.6 16.6 19.5 21.9*

CIS 10.7 12.9 18.4 25.2 35.7 46.0*

Europe 45.9 49.4 54.7 59.0 61.8 65.0*

The Americas 36.3 39.2 44.8 46.3 50.4 55.0*Fixed broadband subscriptions  Africa - 0.1 0.1 0.1 0.1 0.2*

Arab States 0.3 0.5 0.9 1.2 1.7 2.3*

Asia & Pacific 2.2 2.7 3.3 3.9 4.7 5.7*

CIS 0.6 1.3 2.3 4.5 6.1 8.7*

Europe 10.8 14.6 18.3 20.6 22.2 23.9*

The Americas 7.2 9.1 10.9 12.4 13.5 15.5*Source: © INTERNATIONAL TELECOMMUNICATION UNION, 2010. Updated on 21 October 2010.

Source: RIA SA Communications Sector Performance Review 2009

Mobile vs fixed broadband in South Africa

Total Cost of Mobile Ownership

Policy reform outcomes Overall sector growth but suboptimal While phenomenal mobile growth fixed line growth for voice services,

opportunity to extend customers up value chain inhibited by access and usage high costs, low PC ownership and IT literacy.

Sector supported by high end users able to pay high prices but quickly becomes saturated, not reaching critical mass for network effects for next generation ICTs.

Low penetration of fixed broadband and unlike mature economies, mobile broadband used as primary service rather than complementary services for many broadband users

High prices for all retail and wholesale services inhibit optimal usage and high input cost into other sectors.

High input costs for business, inflate costs of service sector and inhibit investment, location of regional business headquarters and BPO opportunities with associated negative consequences on job creation.

Dearth of competencies and capacity in state institutions, private sector and users

Absence of official ICT statistics and indicators for evidence based policy or delivery or co-ordination

Broadband Communications Supply Chain

Adapted by author from Williams, 2010

Undersea cable developments

Capacity of Undersea Cables

Source: Steve Song, Shuttleworth

Foundation 2010

Terrestrial backbone challenge -Arising broadband policy questions

Open access policy - access to what? Facilities or service based licences? inter-platform competition main driver of broadband penetration.

Facilities-based intra-platform competition is found to have had a insignificant impact on broadband penetration, while services based intra-platform competition is found to have had even a negative impact. ULL?

penetration and ladder of investment theoriese not provide the justification to impose extensive mandateory access obligations (Bouckaert, van Dijk, Verboven 2010)

Service based competition, short term gains – lower prices, range of services – but negative long term investment consequences (Bauer 2010)

State capacity to manage strategies eg. ‘ladder of investment’? Functional / Structural separation? Models of funding/participation – public private partnerships, anchor

tenants.

Backbone extension strategies Ownership and management

Investment US$2010

Ethiopia 10 000km network jointly built by government and Chinese vendor ZTE

Incumbent 2billion

Cote d’Ivoire 2000 km fibre optic network Cote d’Ivoire Telecom (incumbent)

90m

Kenya Private sector contracted to build 5000km fibre optic network

Telkom Kenya(incumbent)

60m

4000km complete Kenya Data Networks(Private)

2009 Altech provided 39.5m

South Africa Network has expanded to 12250km (trunk)

Infraco Broadband Limited (wholly owned by the state)(Telkom )

2006/2008: 19m (funding from DPE)2009/2010: 34.7m

5000km network (trunk & metro)

MTN, Neotel and Vodacom (co-build)

300 m

2200km dark fibre laid (metro)

Dark Fibre Africa(Private)

300 m

Uganda Huawei contracted to rollout 2100 km of fibre in three phase (concession – BOT)

Uganda Telecom(incumbent)

106.59m

State sector relations – political economy of reform

• Calls for unfettered markets fail to acknowledge complexity of infrastructure industry, inherent bottlenecks , required co-operation among competitors and investment incentives.

• Reduction of state size associate with neo liberal reforms reduced state ability to implement very economic/political reforms being proposed

• Lack of institutional capacity to reform monopoly and duopoly markets and regulate them effectively

• Not a question of How much state? But What kind?

• Each sector presents distinct constrains and opportunities for State involvement

• Considerable evidence of success of regulatory state – well regulated markets efficiently allocating resources in ICT sector, with associated price and distribution effects.

• Also underpins democratic policies which protect citizen’s rights communication which might be undermined by market failure or lack of service to uneconomic areas, seek to promote consumer welfare and information societies and knowledge economies.

Developmental State

Characteristics of success developmental state (East Asian Tigers – Japan, through to Korea, Taiwan, Singapore) Johnson (1989), Castells (1999), Evans (1995), Haggard (2004), Woo Cummings (1999), Schneider (1999) Singh (1999) Makandawire (2000) Khan (2002)

Autocratic state Embedded state

(domestic capital) Efficient/meritocratic

bureaucracy Legitimacy/national

project

‘Dessarollista’ state (political capitalism) of Latin America// South Africa?

India/South African ?developmental state - ‘fettered’ by democracy

‘Predatory’ state of Africa.

VS

Telecom Regulatory Environment

EfficientInefficient

Summary of SA telecom market

Source: ITU

2010

SA has a very concentrated market

result: high prices

•The state remains a significant player in the telecoms market although it has sold its stake in some companies

•Mobile market: dominated by MTN and Vodacom, CellC captures a small market share

•Fixed market: dominate by Telkom, Neotel is a new entrant

Market Concentration

Herfindahl-Hirschman Index (using customer market share)

Source: Vodacom & MTN Annual Reports, CellC press releases, authors’

own calculations

The State is a significant player in the sector

Shareholdings in Telkom, Sentech and Infraco (through Eskom and Transtel)

• New structure in state ownership• Sale of Telkom Media • Sale of IT company Aviria.com• Telkom sold a 15% stake in Vodacom to

Vodafone; it distributed the remaining 35% to its shareholders

• The Government continues to own 37,7% of Telkom and 14% direct shareholding in Vodacom

Market structure - Ownership

Source: Research ICT Africa 2010 Sector Performance Review

South Africa - state owned broadband company

Without reference to the public and cutting across the ‘failed’ policy of managed liberalisation’, Ministry of Public Enterprises announced state owned broadband company.

Minister of Public Enterprises Alec Erwin : Markets in Africa not deep enough for foreign investment. (Untested).

Head of Competition Tribunal David Lewis: it is not that markets in South Africa not working, but we have not created working markets.

Incorporation of power and transport communications networks into new state owned broadband company...

Broadband Infraco Act 33 of 2007, but only licensed in October 2009.

“state led intervention to rapidly normalise telecoms market efficiency by commoditising only those part of infrastructure that impeded private sector

development and innovation in telecom services and content offerings.” (Infraco Annual Report 2008).

Practically the intervention has two components. national long distance fibre optic network, building on the original fibre optics assets deployed by the power utility Eskom’s power transmission lines and the railway infrastructure of Transnet. the international marine cable network, WACS, between South African and the United Kingdom, in competition with the club consortium monopoly cable, SAT 3.

Network investment and development...

Internet usage in South Africa

Source: RIA South African 2007/8 ICT Household and Individual User Survey

PerformanceInternet | Usage

Households with a working computer and

internet connection in Africa

Source: RIA ICT Access and Usage

Household and Individual Survey 2007-2008

SA continues to dominate internet access within sub-Saharan African but with lower penetrations rates and high prices by other lower middle income country standards

Proportion of household with Internet access at home

Source: ITU 2010

Extraordinarily high prices and low penetration compared to other middle income countries 2,8 subscribers per 100

inhabitants in 2009 ICTs and broadband at centre of

economic policies in leading countries and of African best performers - Algeria, Tunisia, Morocco, Mauritius, Kenya.

PerformanceBroadband | Access

Broadband subscribers per 100 inhabitants, in OECD graph

2009

The lowest uncapped and unshaped bandwidth being offered in most countries exceeds the highest in South Africa

PerformanceBroadband | Price

Minimum Subscription Price, USD for OECD countries, October 2009, compared

to SA

South Africa's lowest (left of bar) & highest (right of bar) broadband prices

compared to OECD

Policy and regulatory issues arising Lack of state policy and regulatory co-ordination (managed

liberalisation in sector with infrastructure development as part of developmental state).

Clash of public utility and competition/sector regulation cultures

Concentration of state ownership in sector and potential conflict of interest

Open Access to backbone unclear, terms of entry Concerns that ROR pricing may be anti-competitive, low cost

of capital Concerns that it has squeezed out private investment –

delays meant private investment returned by co- build by MTN, Vodacom, Neotel

Co-ordination of rights of way, access to spectrum

New broadband policy – October 2009

Fails to address what the bottlenecks and restrictions within sector itself

Fails to consider what is preventing the development of the market

No reference to regulatory framework, issues of co-ordination of rights of way, spectrum management, that have plagued first phase roll out.

No clear separation of services and infrastructure to create greater clarity market pricing and access to infrastructure.

New broadband policy - 2

No clarity on open access: Faster market development, local champions, enable rapid deployment in poorer areas, opportunities for innovation, SME

No direction on infrastructure sharing / functional separation/ structural separation

No opportunity for maximizing public and private finance in infrastructure , new investment models , cheaper bandwidth

No location in macro-economic recovery stimulation, job creation, llinkages between broadband penetration and increases in GDP/demand side

Key factors for success Next generation policy & regulation which includes the

incentivisation of innovation in a dynamic ecosystem. State co-ordination and demand side stimulation Institutional arrangements – clear role separation Institutional capacity and technical capabilities Enable provincial or municipal initiatives on open access

basis Market entry, open access network including

bitstream/LLU? Open access to carrier network Interconnection/spectrum/ numbers Co-ordinate rights of way / spectrum access

This research is made possible by the International Development Research Council of Canada.

For further information see www.researchICTafrica.net

Contact Alison Gillwald at agillwald@researchICTafrica.net

+27 214476332

References Evans, P. (1997). Embedded Autonomy: States and Industrial Transformation: Princeton

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Development, 38(4), 53-81. Gillwald and Stork (2008) Towards Evidence Based Policy: ICT access and usage in 14 African

countries available at www.researchICTafrica.net Calandro, Gillwald, Moyo & Stork (2010) Towards Evidence based policy: ICT Sector

Performance Across 17 African countries available at www.researchICTafrica.net Johnston, C. (1999). The Developmental State: Odyssey of a Concept. In M. Woo-Cummings

(Ed.), The Developmental State. New York: Cornell University Press Khan, M. H. (2005). Markets, State and Democracy: Patron-Client Networks and the Case for

Democracy in Developing Countries. Democratization, 12(Issue 5 Special Issue of Democratisation: On the State of Democracy), 704-724.  

Mkandawire, T. (2001). Thinking about Developmental Sates in Africa. . Cambridge Journal of Economics(25), 289-214 

Schneider, B. R. (1999). The Desarrollista State in Brazil and Mexico. In M. Woo-Cummings (Ed.), The Developmental State. New York: Cornell University Press.

Singh, J. (1999). Leapfrogging Development? The Political Economy of Telecommunications. New York: State University of New Work Press.