VZCZCXRO9665
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #1033/01 1410743
ZNR UUUUU ZZH
R 210743Z MAY 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8560
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 001033 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
DEPT FOR EEB/CIP 
DEPT FOR EEB ALAN GIBBS 
 
E.O. 12958: N/A 
TAGS: ECPS ELAB EIND EINV EINT PGOV PREL USTR SF
SUBJECT: VODACOM COURT DECISION PROVIDES TEMPORARY REASSURANCE TO 
FOREIGN INVESTORS 
 
REF: 
¶A. 09 PRETORIA 981 
¶B. 09 JOHANNESBURG 82 
¶C. 09 PRETORIA 249 
¶D. 09 PRETORIA 473 
 
This cable contains company proprietary information. 
 
¶1. (SBU) Summary.  Vodacom listed its shares on the Johannesburg 
Stock Exchange (JSE) on May 18 after legal actions by the Congress 
of South African Trade Unions (COSATU) and ICT regulator the 
Independent Communications Authority of South Africa (ICASA) failed 
to stop the unbundling of state-controlled, fixed-line operator 
Telkom and mobile operator Vodacom.  The dissolution had the support 
of industry and the outgoing administration because it would provide 
a large boost in foreign direct investment, improve sector 
competitiveness, and allow Telkom and Vodacom to pursue independent 
investment strategies in Africa.  Last-minute COSATU activism almost 
derailed the process.  Continued labor actions combined with ICASA's 
last-minute decision to support COSATU have heightened investor 
fears regarding the South African investment climate.  Foreign and 
local market entrants have had to depend on a series of court 
decisions to uphold legislation and initiatives intended to increase 
ICT market liberalization.  There is potential for ICT market growth 
in South Africa, especially with the introduction of additional 
broad-band capacity beginning as early as July 2009.  However, the 
slow pace of implementation of liberalization policies combined with 
continued labor activism could deter foreign investment and 
competition, which is required to mitigate high ICT costs stemming 
from Telkom's historic monopoly control of the country's ICT 
infrastructure.  Foreign investors were closely watching the 
incoming Zuma administration for signals of economic policy shifts 
towards the left and took COSATU's interventions as a negative sign 
for future investment potential.  The new administration will have 
to continue to reassure investors that COSATU will not be 
determining national economic policy if it hopes to continue to 
attract the foreign investment needed to maintain high levels of 
economic growth and employment.  End Summary. 
 
----------------------------- 
COURT DECISION ALLOWS VODACOM 
TO PROCEED WITH JSE LISTING 
----------------------------- 
 
¶2. (U) Mobile-operator Vodacom listed its shares on the Johannesburg 
Stock Exchange (JSE) on May 18 after legal actions by the Congress 
of South African Trade Unions (COSATU) and ICT regulator the 
Independent Communications Authority of South Africa (ICASA) failed 
to stop the unbundling of Telkom and Vodacom.  The listing is part 
of a deal that involves state-controlled, fixed-line operator Telkom 
selling a 15 percent stake in Vodacom to UK-based, joint-owner 
Vodafone.  The court decision allows Vodafone to increase its 
ownership in Vodacom from 50 to 65 percent and to expand its 
emerging-market footprint.  Telkom is spinning-off the remaining 35 
percent to its shareholders (except for U.S. stakeholders, who will 
receive cash).The South African Government (Telkom's top 
shareholder) has pledged to hold 10 percent of Vodacom for at least 
a year. 
 
¶3. (SBU) The dissolution had the approval of the outgoing 
administration because it would provide a large boost in foreign 
direct investment.  Telkom's relationship with mobile operator 
Vodacom had been difficult and under the partnership agreement 
Telkom was restricted from offering mobile services.  Vodacom also 
lost out on lucrative mobile deals in Africa because the agreement 
Qlost out on lucrative mobile deals in Africa because the agreement 
prevented it from operating in some parts of Africa where Vodafone 
was present.  The split is expected to allow both to pursue 
independent investment strategies that would improve consumer 
product offerings and improve sector competitiveness.  Proceeds from 
the Vodacom sale would allow Telkom to pursue its strategy of 
further expansion into sub-Saharan Africa.  Finalization of 
operational details for Telkom's recently announced partnership with 
AT&T had been delayed partially due to Telkom's inability to 
complete the sale of Vodacom shares (Reftel A).  The new partnership 
with AT&T would allow Telkom to leverage AT&T's network (which has a 
97 percent global reach) and meet the infrastructure requirements 
Telkom has agreed to provide FIFA for the 2010 World Cup. 
 
----------------------------- 
COSATU AND ICASA INTERVENTIONS 
ALMOST DERAILED DEAL 
----------------------------- 
 
¶4. (SBU) Last-minute labor activism almost derailed the long-awaited 
dissolution of the Telkom-Vodacom partnership, which permitted the 
independent Vodacom JSE listing.  COSATU sought legal action against 
 
PRETORIA 00001033  002 OF 003 
 
 
Telkom, the Minister of Communications, Vodafone, and Vodacom to 
impede the pending sale (Reftel B).  In a move that surprised 
industry analysts, ICASA reversed its prior decision to support the 
unbundling and joined the legal case in solidarity with COSATU. 
COSATU expressed concern that the UK-based Vodafone group would use 
the global economic crisis as an excuse to cut jobs as part of its 
justification for pursuing legal action.  Vodacom announced on May 
19 that it would not eliminate jobs as a result of the dissolution. 
 
 
¶5. (U) Local Economist Peter Montalto said there were political 
rifts behind the scenes that led to ICASA's change of heart.  The 
outgoing government, National Competition Tribunal, and ICASA all 
approved the transaction in February and the regulator had months to 
raise objections.  Montalto speculated that COSATU-affiliated 
ministers in the new administration might have had "undue influence 
on the industry regulator, which buckled under pressure and joined 
the bid to stop the listing so it could stage public hearings on the 
transaction." 
 
6 (SBU) ICASA announced that it would not challenge the May 18 court 
ruling in favor of the dissolution and would not pursue public 
hearings.  However, COSATU officials told Labor Officer the union 
would not back down despite the court ruling.  COSATU is now calling 
for a boycott of Vodacom and has vowed to continue with an existing 
application for a full legal review of Telkom's unbundling of 
Vodacom.  The boycott is seen as an empty threat and is not expected 
to negatively impact Vodacom's bottom-line since MTN is currently 
the only main rival providing mobile services in South Africa. 
MTN's mobile service rates are higher than Vodacom's and the third 
mobile-operator, Cell C, utilizes Vodacom's network. 
 
------------------------- 
LABOR INTERVENTIONS SHAKE 
INVESTOR CONFIDENCE 
------------------------- 
 
 
¶7. (U) Continued COSATU actions combined with ICASA's decision to 
support COSATU have heightened investor fears regarding the South 
African investment climate.  The South African currency declined by 
three percent on May 15, when COSATU's legal actions threatened the 
deal.  Vodafone had already brought R20.5 billion ($2.4 billion) 
into the country to fund the deal, so blocking it would have further 
hurt the currency.   Annulment of the deal combined with the rand's 
decline (blamed largely on COSATU) would have inflicted a national 
foreign exchange loss of R500 million ($59 million).  The rand 
recovered by 1.2 percent on May 18 after the court ruled in favor of 
the Vodacom deal. 
 
¶8. (U) The local press reports that foreign investors have called on 
President Zuma to clarify South Africa's stance on foreign 
investment, warning that union activism could herald the start of a 
new investor-deterring trend.  Investors are demanding for the new 
administration to spell out its economic policies more clearly, 
particularly since COSATU is going to continue with legal challenges 
against the Vodacom deal despite the May 18 court ruling.  Analysts 
warned that a South African decision to block majority foreign 
ownership of Vodacom could also harm South African companies such as 
Telkom and MTN, who were trying to expand on the continent, if other 
African countries decided to adopt similar policies. 
 
------------------------- 
COURTS CONTINUE TO UPHOLD 
MARKET LIBERALIZATION 
------------------------- 
Q------------------------- 
 
¶9. (SBU) Foreign and local market entrants have depended on a series 
of court decisions to uphold legislation and initiatives intended to 
increase ICT market liberalization.  Analysts said "the failure of 
COSATU's bid to halt the listing was welcome evidence of judicial 
independence that will help to salvage South Africa's reputation 
among global investors."  Similarly, former Minister of 
Communications Matsepe-Caseburri (Reftel C) and her Director General 
Lyndall Shope-Mafole thwarted implementation of the 2005 Electronic 
Communications Act (ECA) and ICASA independence until the courts 
interceded on behalf of market liberalization. 
 
¶10. (U) Matsepe-Caseburri publicly advocated a policy of "managed 
liberalization" during her tenure and personally intervened to block 
ICASA from converting value-added network service (VANS) licenses 
into individual electronic communications network service (I-ECNS) 
licenses required to develop national networks that would compete 
with Telkom (Reftel C).  Her interventions delayed the license 
conversion process by three-years and the process was only completed 
after a Pretoria high court decision finally forced ICASA to 
 
PRETORIA 00001033  003 OF 003 
 
 
complete licensing in January 2009. 
 
---------------- 
NEW APPOINTMENTS 
PUZZLE INDUSTRY 
---------------- 
 
¶11. (SBU) Industry analysts had high hopes for new leadership at the 
Ministry of Communications after the death of Matsepe-Cassaburri in 
March 2009.  Her death and the ousting of Shope-Mafole for 
supporting the new opposition COPE Party had left a leadership 
vacuum at the Ministry of Communications that industry analysts had 
hoped would have been filled with someone with technical expertise 
in the sector.  However, industry analysts were perplexed by the 
appointment of Siphiwe Nyanda, a former military general with no ICT 
background, as the new Minister of Communications.  Nyanda was chief 
of staff of the African National Congress' (ANC) military wing 
during the anti-apartheid struggle and then held senior armed forces 
posts after the ANC won power in 1994. 
 
¶12. (SBU) Industry analysts speculate that Nyanda's lack of 
experience in the sector could mean that he would take "a cautious 
approach, steering clear of bold steps" needed to improve 
competitiveness.  According to press reports, new Director General 
Dina Pule (a left-leaning activist) may become a vocal second in 
command.  "She has a history of being quite fearless in her 
criticism of mismanagement and corruption, which may make life 
difficult for Telkom's underperforming management." 
 
------- 
COMMENT 
------- 
 
¶13. (SBU) There is potential for ICT market growth in South Africa, 
especially with the introduction of additional under-sea, 
fiber-optic, broad-band capacity and new competitive partnership 
agreements with international companies such as AT&T and Tata 
Corporation.  However, the slow pace of ECA implementation and 
COSATU activism could deter foreign investment and competition, 
which is needed to offset high ICT costs stemming from Telkom's 
historic monopoly control of fixed-line, mobile, and satellite 
infrastructure.  ICASA's recent change of heart to rescind its 
earlier support for the Vodacom sale indicates that the regulator's 
independence is still hampered by political considerations despite 
leadership change at the Ministry of Communications.  Recent market 
liberalization efforts have only proceeded as a result of legal 
decisions by the independent courts. 
 
¶14. (SBU) Foreign investors were closely watching the incoming Zuma 
administration for signals of economic policy shifts towards the 
left and took COSATU's interventions as a negative sign for future 
investment.  COSATU believes its political clout has increased 
because of its support for Zuma's candidacy and its recent success 
in getting the South African Airways (SAA) CEO ousted for 
irregularities in tender contracting at the state-owned airline 
(Reftel D).  The new administration will have to continue to 
reassure investors that COSATU will not be determining national 
economic policy if it hopes to continue to attract the foreign 
investment needed to maintain high levels of economic growth and 
employment.  End Comment. 
 
LA LIME