By Prof Nicola Theron and Helanya Fourie

South Africa’s slow internet connections and high data costs have been criticised by most industry participants – including government, large companies and consumers. The ICT White Paper published in 2016 emphasized the need for more competition in the ICT sector to reduce prices and stimulate economic growth. The ICT sector is an important enabler of economic growth and bottlenecks in this sector have to be addressed as a matter of urgency. One such bottleneck – high demand spectrum that the industry regulator (ICASA) has not yet assigned to operators – has now become the object of significant interest, as a new solution has been proposed in the recently released Electronic Communications Amendment Bill. The Bill was published on 17 November 2017 and industry players have until the 31st of January 2018 to provide their comments.

The assigning of the remaining high demand spectrum is not a new issue and ICASA has attempted to solve this problem on two previous occasions. In 2011, ICASA published a draft Invitation to Apply (ITA) for the combined licencing of 800 MHz and 2.6 GHz bands, but this process came to a halt fairly early and was deferred until further notice. More information on the planned assignment of prospective licences were provided by ICASA during 2015, and in 2016 ICASA issued a new ITA for a selection of spectrum bands. This process was however delayed by various litigation proceedings, and the spectrum remains unassigned.

The Amendment Bill provides a novel alternative to the problem of how the high demand spectrum should be assigned. It proposes that the remaining spectrum should be assigned to a wireless open access network (WOAN) provider; a concept that was introduced in the ICT White Paper 2016. There are various reasons why – in South Africa – this should be seen as an improvement over a spectrum auction. Internationally, spectrum auctions are usually employed to assign spectrum as it has the benefit of distributing spectrum in a manner that reflects supply and demand ceteris paribus. While economists are generally in favour of relying on market forces for the distribution of resources, a spectrum auction would not necessarily support South Africa’s developmental goals. In South Africa, it is reasonable to assume that the outcome of a spectrum auction will be that the incumbent operators with ‘deep pockets’ will obtain the most valuable spectrum. This will further enhance the structural problems in the mobile telecoms sector (high concentration levels) which remains dominated by the incumbents.

The introduction of a WOAN will see competition in the sector moving away from infrastructure-based to service-based competition. This is a welcome move, as the ICT sector is characterised by high barriers to entry due to considerable network investment costs. Through the WOAN, new players will be able to enter e.g. the mobile market without the need to invest in the fixed costs associated with establishing a network: they will be able to obtain spectrum via the WOAN and access infrastructure on an open access basis. The objective is for more competition in the retail level to put downward pressure on the price of especially mobile broadband services.

It must be highlighted that there are not many jurisdictions where a WOAN has been successfully implemented. Kenya and Russia have planned to introduce a Single Wireless Network (SWN) – a variation of a WOAN where there is a single wholesale network – but most progress to date has been reported in Mexico and Rwanda. Whether the SWN in these countries will have the desired outcomes however remains to be seen.

In principle, the WOAN is a good idea for South Africa, but there are certain pitfalls which government should heed. Creating a SWN by requiring all high demand spectrum to be returned to the state (an idea which is canvassed in the Amendment Bill), would simply establish a monopoly with all the inefficiencies associated with such a market structure and which may translate into higher retail prices. It will also create considerable uncertainty in the market and will negatively affect investment and perceptions about property rights. The Bill also plans to prohibit spectrum trading, which will further stifle market developments. Furthermore, while the Bill specifies that the WOAN will provide spectrum on an open-access basis, more detail is needed of how the pricing and access principles will work. Cost-based access has proven difficult to determine in the case of e.g. mobile termination rates. Finally, government will have to ensure that there is a sustainable business case for the WOAN, by setting reasonable network and population coverage targets. Yet, while much more work needs to be done on exactly how the WOAN is to be structured and implemented, the idea certainly has the potential to bring more competition to South Africa’s telecoms market.

Author/s: Prof Nicola Theron and Helanya Fourie

Nothing in this publication should be construed as advice from any employee of Econex and should be seen as general summaries of developments or principles of interest that may not apply to specific circumstances.