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FM AMEMBASSY PRETORIA
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INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
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RUCPDC/DEPT OF COMMERCE WASHDC
RUEHGV/USMISSION GENEVA 1280

UNCLAS SECTION 01 OF 04 PRETORIA 000249 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
DEPT FOR EEB/CIP/KATHERINE TOWNSEND 
USTR FOR CATHERINE HINCKLEY 
 
E.O. 12958: N/A 
TAGS: ECPS EINT SF
SUBJECT: SOUTH AFRICA RESPONSE TO TELECOM TRADE AGREEMENT 
REVIEW 2009 
 
REF: A. STATE 04730 
     ¶B. PRETORIA 271 
     ¶C. PRETORIA 1976 
     ¶D. PRETORIA 1278 
 
Sensitive But Unclassified, Not for Internet Distribution 
 
¶1. (SBU) Summary.  Information Communications and Technology 
(ICT) Officer met with the Independent Communications 
Authority of South Africa (ICASA), industry analysts, and ICT 
firms to discuss the ICT regulatory environment in South 
Africa.  Officials noted that ICASA faced major challenges in 
implementing policies to increase liberalization in the 
sector given the historic dominance of state-controlled 
Telkom South Africa.  The Department of Communications (DOC) 
has a history of impeding ICASA mandates, which have led to 
considerable delays in licensing processes.  They cited 
technical skills shortages and the continued need for 
regulatory capacity building as the greatest area of 
challenge for the regulatory agency.  ICASA could benefit 
from a round of Federal Communications Commission (FCC) 
technical assistance workshops.  End Summary. 
 
----------------------------------- 
ICASA Agrees With Industry Comments 
----------------------------------- 
 
¶2. (SBU) ICT Officer met with officials at ICASA to discuss 
industry comments USTR has received concerning the regulatory 
environment in South Africa (Reftel A).  ICASA officials 
generally agreed with the industry comments and identified 
major challenges in increasing liberalization in the sector. 
ICASA is in the process of implementing new policies intended 
to improve the competitiveness, but officials have 
acknowledged that industry criticism regarding regulatory 
independence and delays in licensing were not misplaced 
(Reftel A).  They cited South African Government (SAG) 
interference and a shortage of technical capacity at ICASA to 
effectively address spectrum allocation and price-structuring 
for call termination fees as a cause for delays in licensing 
and regulatory decision-making processes. 
 
-------------------------------- 
Implementation of Liberalization 
Policies Get Off to a Slow Start 
-------------------------------- 
 
¶3. (SBU) The SAG first began pursuing "managed 
liberalization" of the industry in 1996.  However, it was not 
until the Telecommunications Amendment Act of 2001 and the 
Electronic Communications Act (ECA) of 2005 were passed that 
major strides were made to end state-controlled Telkom's 
monopoly.  Previously, Telkom enjoyed a protected monopoly 
status for the development of both fixed-line and mobile ICT 
networks and for the provision of services.  After lengthy 
delays in implementation of the Telecommunications Act, a 
second national operator Neotel began operations in December 
¶2005. 
 
¶4. (U) The ECA was promulgated to further increase 
liberalization in the sector and ICASA was charged with its 
implementation.  The ECA tasked ICASA to issue new licenses 
to Value-Added Network Service (VANS) providers (i.e., mobile 
and internet service providers).  ICASA was also required to 
ensure that licensees have no specials privileges over one 
another.  However, due to interventions by the DOC, ICASA 
missed the original November 2007 time-frame to issue these 
licenses.  ICASA finally awarded these licenses in January 
¶2009.  The ICT market is expected to become more competitive 
in 2010 once the associated spectrum is allocated sometime in 
late 2009, which will allow these new licensees to develop 
national networks. 
 
Q 
¶5. (SBU) Additional legislation was passed in June 2006 to 
resolve remaining barriers in this sector, including the 
DOC's failure to empower ICASA.  The ICASA Amendment Bill 
provided some independence to ICASA, but the fact that the 
DOC must approve ICASA's funding allows it to influence 
ICASA.  ICASA has begun to address technical capacity 
problems, has fully staffed all vacant executive management 
positions, and has revamped its website to improve public 
access to ICASA notices.  Critics believe ICASA needs to be 
further strengthened to better carry out its regulatory 
mandates. 
 
 
PRETORIA 00000249  002 OF 004 
 
 
--------------------------------------- 
Telkom Retains Dominant Market Position 
But Is Starting to Face Competition 
--------------------------------------- 
 
¶6. (SBU) U.S. and local ICT companies, industry analysts, and 
the media remain critical of the lack of competitiveness in 
the South African ICT market.  Telkom continues to maintain a 
dominant position in the provision of value-added and basic 
ICT services despite the passage of the ECA.  South Africa 
has some of the highest telecommunications prices in the 
world, mainly due to Telkom's historic control of the 
underlying ICT network infrastructure.  Neotel is developing 
its own national network as an alternative to 
Telkom-controlled infrastructure, which has brought some 
price competition to the market. 
 
¶7. (SBU) SAG recently announced that it would allow 
India-based Tata Communications to increase its stake in 
Neotel to gain a 56 percent controlling share.  The SAG also 
approved the sale of Telkom's Vodacom shares to UK-based 
parent company Vodafone.  The transaction will give Vodafone 
a 65 percent controlling share and allow Telkom and Vodacom 
to pursue independent strategies that will increase 
competition in the mobile sector.  The DOC also started 
addressing some of the problems facing VANS providers through 
limited liberalization policies that were initiated in 
February 2005.  As a result, mobile operators are allowed to 
use any fixed-lines in the provision of their service, VANS 
cans be offered through non-Telkom infrastructure, and VANS 
providers are allowed to provide voice services.  In 
addition, private ICT network operators were allowed to sell 
spare capacity. 
 
----------------------------------------- 
Department of Communications Continues to 
Pursue "Managed Liberalization" Policy 
----------------------------------------- 
 
¶8. (SBU) The DOC continues to champion state-owned entities 
and state-sponsored ICT projects.  Minister Ivy 
Matsepe-Casaburri has publicly advocated a policy of "managed 
liberalization," which has the effect of hampering efforts to 
increase competition and ICASA independence.  She delayed the 
ICASA VANS license conversion process through months of legal 
battle to impede VANS from acquiring the new individual 
electronic communications network service (I-ECNS) licenses 
required to develop national networks. 
 
¶9. (SBU) The Pretoria High Court ruled in August 2008, that 
Altech Autopage Cellular had the right to convert its VANS 
license into an I-ECN license.  The ruling also gave other 
VANS the right to develop and operate their own 
communications networks, previously the preserve of large 
industry players such as Telkom, Neotel, Vodacom, MTN, and 
Cell-C.  However, the DOC appealed the court ruling, arguing 
that the DOC's "managed liberalization" policy would be 
seriously undermined if VANS licensees were allowed to obtain 
I-ECNS licenses through the license conversion process.  DOC 
also threatened to issue a policy directive to ICASA 
empowering it to implement an invitation-only application 
process for a limited-number of new I-ECNS licensees in 
accordance with the DOC's managed liberalization policy. 
 
¶10. (SBU) The DOC interventions delayed the announcement of 
I-ECNS licenses.  The High Court rejected the DOC's appeal on 
all points in October 2008.  The Minister finally conceded 
and announced that she would withdraw legal challenges to the 
Qand announced that she would withdraw legal challenges to the 
conversion process on November 21.  The Minister's decision 
not to appeal meant that Altech and about 300 other voice and 
data carriers could apply for a license to build their own 
network infrastructure without further risk of their 
investment being legally challenged. 
 
--------------------------- 
Challenges Remain with VANS 
License Conversions 
--------------------------- 
 
¶11. (SBU) The DOC decision not to continue appeals paved the 
way for ICASA to complete the license conversion process by 
January 19, as required under the ECA.  However, ICASA had 
less than two months to release a call for applicants and 
announce the final recipients.  According to industry 
analysts, ICASA started the VANS license conversion process 
 
PRETORIA 00000249  003 OF 004 
 
 
without finalizing the costs for these licenses.  This 
created uncertainty for the companies interested in acquiring 
a license.  ICASA is also awaiting policy directives on 
licensing fees from the DOC. 
 
¶12. (SBU) ICASA is now undertaking the difficult task of 
determining spectrum allocation to accompany these new I-ECNS 
licenses.  Industry representatives expect the final spectrum 
size of each license to be between 20 and 30 megahertz, what 
they claim is the minimum required to develop a national 
network.  ICASA only has 120 megahertz worth of spectrum to 
allocate to all new I-ECNS licensees.  In contrast, Telkom is 
sitting on 50 megahertz worth of spectrum that it was 
allocated in the pre-liberalization era to develop a WiMax 
network.  Telkom has not made use of this license beyond the 
testing-phase, but it will not lose its license or "un-used" 
spectrum as long as it continues testing.  Industry analysts 
complained that Telkom has no short-term incentive to develop 
a national WiMax network as long as other operators are not 
allocated the required spectrum to develop national networks. 
 They speculate that Telkom's influence with government might 
have been the cause of the extensive legal challenges that 
led to delays in the ICASA VANS conversion process. 
 
¶13. (SBU) Companies interested in developing I-ECNS national 
networks claim that licensing delays will affect their 
ability to develop infrastructure in time for the 2010 FIFA 
World Cup.  They emphasize the need to make timely decisions 
on spectrum allocation so they can finalize financing 
packages and begin rolling out their networks.  They are 
under the impression that ICASA will make spectrum allocation 
decisions by the end of the first quarter of 2009.  However, 
ICASA officials told ICT Officer that spectrum allocation is 
the greatest area of technical challenge for the regulator 
and expected the decision-making process to take at least six 
months. 
 
¶14. (SBU) According to U.S.-based ICT companies, South Africa 
would not be overwhelmed by new network operators as a result 
of the VANS/I-ECNS license conversion process, given the high 
costs of building a national broadband network in South 
Africa.  It is estimated to cost between $125-200 million to 
build a national network, so most small players could not 
afford to do so on their own.  One alternative would be for 
several small players to jointly share the cost of a single 
network.  U.S.-based companies also expressed concern 
regarding potential Black Economic Empowerment (BEE) 
shareholding requirements.  ICASA considered requiring 51 
percent BEE equity ownership for new licensees, which would 
create market-entry challenges for foreign investors.  ICASA 
appears to be softening its stance on majority BEE ownership 
requirements, but has not made a decision on this issue yet. 
 
------------------------------------------- 
Undersea Cable Projects also Delayed by DOC 
------------------------------------------- 
 
¶15. (SBU) Telkom has historically held tight control over the 
existing fiber-optic cable system along Africa's west coast. 
This has led to high cost and limited access to international 
broadband bandwidth.  SEACOM, a new U.S.-led undersea 
fiber-optic cable that will end Telkom's monopoly on 
high-speed bandwidth, is expected to be operational on 
Africa's east coast this June despite initial DOC challenges. 
 U.S.-led SEACOM decided to restructure its consortium 
Q U.S.-led SEACOM decided to restructure its consortium 
shareholding to include 75 percent African ownership when 
Minister Matsepe-Casaburri made public announcements seeking 
a minimum of 51 percent African ownership for any cable 
projects landing in South Africa. 
 
¶16. (SBU) Other Africa-wide cable projects (especially those 
which would have provided coverage on Africa's west coast in 
time for the 2010 FIFA World Cup) also suffered delays 
because of DOC's stance regarding local ownership rules.  A 
Ugandan minister publicly criticized the South African DOC 
last year for pursuing these local ownership rules, which 
have adversely impacted other African countries that would 
have benefited from earlier implementation of these projects. 
 
¶17. (SBU) SEACOM is partnering with Neotel to provide 
bandwidth in South Africa.  SEACOM's relationship with Neotel 
(and all landing parties in other African countries) is based 
on an "open access", market-based cost structure.  The SEACOM 
price structure will be significantly lower (the estimates 
are between one-tenth and one-twentieth of current costs) 
 
PRETORIA 00000249  004 OF 004 
 
 
than current satellite or fiber-optic pricing controlled by 
Telkom. 
 
---------------------------------- 
Policies Unlikely to Change Unless 
There is a Change in Leadership 
---------------------------------- 
 
¶18. (SBU) Most industry representatives and analysts believe 
that the ICT policy environment is not likely to change much 
while the current Minister of Communications is in power. 
Post has heard conflicting reports of whether she would 
retain her position following the spring general elections. 
Despite widespread industry complaints, she was not replaced 
when some Mbeki-appointed Ministers were replaced when 
President Motlanthe took office last fall.  (Note: President 
Mbeki was ousted in September 2008, following a change of 
leadership in the African National Congress (ANC).) 
 
¶19. (SBU) Most industry analysts also believe these policies 
will not change much, nor will ICASA have increased 
independence to implement regulations that promote 
liberalization, as long as Telkom has influence over the SAG. 
 Local companies, including smaller entities that are trying 
to enter the market, claim that Telkom has "pull" with 
Minister of Communications and other high-ranking officials, 
who are likely to support any tactics that result in delays 
in implementation of the ECA.  Some industry analysts believe 
that Telkom is realizing that it will have to begin 
innovating to survive in a competitive market and is trying 
to buy time through additional SAG delays in licensing, price 
determinations, or spectrum allocation for new market 
entrants. 
 
¶20. (SBU) So far, the legal system has been the only real 
recourse for companies affected by anti-competitive behavior 
and problems with ECA implementation.  The courts have come 
out against the Minister of Communications in their 
interpretation of the ECA, thus forcing the DOC and allowing 
ICASA to complete the license conversion process. 
 
----------------------------------- 
ICASA Requests Technical Assistance 
----------------------------------- 
 
¶21. (SBU) ICASA has experienced challenges with skills 
development of its staff.  Industry analysts have cited the 
need for additional training in spectrum 
management/allocation and pricing determination (including 
interconnection and call termination fees).  ICASA officials 
told ICT Officer they would benefit from a round of U.S. FCC 
technical assistance workshops on both issues. 
 
------- 
Comment 
------- 
 
¶22. (SBU) Progress with liberalization in the South African 
ICT sector has been slow, but pressures coming from the 
infrastructure requirements for the 2010 FIFA World Cup have 
provided the impetus for some policy breakthroughs.  Major 
legislative initiatives to end Telkom's monopoly were only 
started in 2005, and it has taken a while for true 
implementation to begin.  The DOC has restricted ICASA 
independence, and new operators have had to turn to the 
courts to pressure the DOC to recognize the legislative 
intent of the above-mentioned liberalization policies.  ICASA 
also needs to boost regulatory expertise among its staff to 
fully implement the ECA. 
LA LIME