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Home/Econex Blog/The Economics of Regulating the Telecoms sector – some observations from the ECA Amendment Bill hearings, 6 & 7 March 2018

The Economics of Regulating the Telecoms sector – some observations from the ECA Amendment Bill hearings, 6 & 7 March 2018

By Prof Nicola Theron & Helanya Fourie

The Department of Telecommunications & Postal Services (DTPS) held a stakeholder consultation workshop in Pretoria on 6 & 7 March to canvass views of industry participants on the proposed amendments to the Electronic Communications Act (ECA) (2005). Industry players have been involved via various industry forums in the amendment process and the opportunity to present their views before the panel of the DTPS was an important milestone. In total, 43 presentations were made over the course of two days, which illustrate the overwhelming interest of all stakeholders. Given the high stakes no stakeholder could afford to miss the opportunity to engage with the DTPS as the policy makers.

Most of the presentations focussed on two main issues flowing from the proposed amendments:

  1. Should the current operators be allowed to keep their high demand spectrum?
  2. Should new spectrum be assigned via a market mechanism (auction) to the highest bidder or should it be assigned in a different manner (e.g. via a wholesale open access network (WOAN))?

The first question flows from the proposal (as set out in section 31(E)(6) of the Amendment Bill) that all high demand spectrum (HDS) currently assigned to licence holders would have to be returned to the state. This proposed clause created significant uncertainty in the industry, and was cited by Vodacom’s CEO (Shameel Yoosub) as the reason why the industry has lost close to R80bn last year. Most of the industry participants agreed that mandating current licence holders to return their spectrum to the state would amount to expropriation which could lead to constitutional challenges.

In terms of the second question – how the unassigned spectrum should be assigned – MTN took the position that government should ‘trust the free market’. MTN CEO Godfrey Motsa promised lower prices if they were to be assigned more spectrum: “With more spectrum, we will improve speeds and sell bigger data at lower prices…The main reason prices are high is because we don’t have spectrum.”

To shed light on these issues, one should ask the antecedent question of how much government should intervene in this sector in order to ensure greater access to affordable telecoms products. While MTN claims that they will improve speeds and lower prices if they are given more spectrum, it is not clear how the market mechanism will solve a deep underlying market failure, i.e. limited access by all South Africans to the internet. Data from the General Household Survey (compiled by StatsSA) show that more than half of all South African households did not have access to the internet in 2015. This is not reflective of a modern developing and robust economy.

If market forces are failing half the population, there can be no doubt that government should play a role. Telecoms are recognised across the world as a sector which is prone to market failure due to its network effects. This type of government/ regulatory failure emphasises the need for coherent regulation and strong institutional bodies that can apply such policy/ regulation to improve allocation and distribution efficiencies.

While the creation of a Wholesale Open Access Network (WOAN) where large and small players can access HDS on equal terms might be the solution to some of the problems of this industry, most stakeholders also agreed that creating a wholesale monopoly will not yield optimal outcomes in the long term. If government chooses to follow the route of spectrum assignment via a WOAN, it must be sure that the correct incentives are in place to let the WOAN succeed. The best option would be to allow the WOAN to be privately owned and managed and respond to market forces like any private company, and not to operate as a monopoly.

Even well-designed policies fail in their objectives if they are not administered by a well-resourced and efficient sector regulator. In this regard it was both interesting and concerning that the industry regulator (ICASA) effectively acknowledged at the hearings that it had failed in terms of its oversight role of infrastructure sharing and interconnection. ICASA was the first stakeholder to present and this came as a startling confession from the regulator in front of the policy maker (DTPS).

Ultimately, and from an economic perspective, South Africa’s telecoms sector needs reasonable and transparent regulation to address the existing market failure. This is quite a challenge and the DTPS needs to ensure that all industry participants are properly consulted in developing the policy. Successful regulation will address the existing market failure to ensure more competition, more access and lower costs.

Author/s: Prof Nicola Theron & 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.

2018-04-23T09:22:54+00:00March 19th, 2018|