Unbundle or else

It will get another chance at this week`s second telecoms pricing colloquium.

At stake is South Africa`s global competitiveness UNBUNDLING of the local loop is as much an economic imperative as important for ensuring "access for all". Easy and affordable access to the Internet or businesses and consumers - is an absolute prerequisite.

With a direct link between access costs and Internet usage, the solution is obvious. Access costs must come down and the only solution is for Telkom to open up competition on the "last mile", which connects homes and offices to its backbone network.

With government in agreement that local unbundling is vital to lowering the price of telecommunications and increasing competition, South Africa at long last seems ready to cross the digital divide and meet the challenges of uplifting the second economy.

Not so. Like all other countries that have gone the local loop unbundling (LLU) route, Telkom, as the incumbent, has resorted to many stalling tactics and arguments to postpone the inevitable.

First on its list of arguments has been the regulatory framework. In a statement released in September, Telkom cites the Telecommunications Act as the reason it cannot be forced by government to unbundle the local loop.

Next it played the infrastructure investment card, saying that: "While local loop unbundling will contribute to increase broadband penetration and competition, we do not believe it will contribute to an increase of investment in infrastructure."

But Telkom should be more original than resort to an argument nullified back in 2000 by the International Telecommunications Users Group (INTUG) and the European Commission, when LLU first came under the spotlight in Europe.

In 2000, incumbent operators in Europe argued the same thing. They maintained that it would encourage only short-term, service-based competition and discourage longer-term infrastructure-based competition. INTUG Europe rejected this view, and maintained that the proposed measures would result in increased competition in the market. That competition, provided it is fair, would result in the correct forms and levels of investment.

Lyndall Shope-Mafole, director-general of the department of communications (DoC) concurs: "High telecommunications costs are among the things impeding the government`s target of achieving 6% growth, and unbundling the local loop is critical to the introduction of competition and lowering costs."

Interestingly, INTUG also noted "it would be very easy for incumbents to frustrate or seriously delay the intentions of the policy". Telkom`s response is a classic case in point.

Industry observers betting on the second pricing colloquium, taking place in Midrand this week, as the forum that will resolve the looming LLU stalemate, should not hold their breaths.

Sure, unbundling the local loop and any other price-related telecoms issue like regulation, self-provision, and broadband penetration will come under the spotlight. And yes, government is making all the right noises and raising expectations that it could force Telkom to unbundle.

In fact, DoC deputy minister Roy Padayachie recently alluded to an announcement in this regard to be made at the colloquium this week.

Padayachie feels strongly about effective and competitive telecommunications services being made available to all. "We cannot hope to achieve universal service with current programmes and at 100 000 DSL subscribers, our broadband penetration is far too low, considering its potential for critical socio-economic contribution!" But history has shown that development of unbundling is a gradual, slow process in most countries worldwide, and may take two to five years to be accomplished.

There is no evidence that unbundling has slowed investment in new infrastructure or innovation. In OECD (the organisation for Economic Cooperation and Development) countries that have introduced unbundling investment is proceeding apace. Not surprising then that the average broadband prices in OECD countries are R300 per month. For the same service, however, South Africans pay three times as much - or R900 - and this, the OECD ascribe to Telkom`s dominance.

Still, Telkom isn`t likely to back down soon. The four main obstacles that lie ahead for South Africa, according to the Yankee Group, are provisioning delays, service quality, unbundled access price and legal disputes.

In fact, on the subject of provisioning delays, it notes that: "Incumbents normally delay the unbundling process while meeting the demand, exploring the maximum time permitted, and calling for renegotiations in each part of the process."

Telkom`s reason for wanting to do the same is simple - it has not yet achieved its desired return on network investment. As was the case with many other incumbents in other OECD countries, Telkom in the past three years has invested a large amount of resources in network expansion, and still has fixed-line investment goals.

Another argument Telkom is likely to resort to in this regard will be that unbundling will undermine its existing investment in alternative access networks and make its access modernisation difficult.

Perhaps the most disconcerting obstacle, identified by the Yankee Group, is the use of legal disputes against the regulatory body in each phase of LLU negotiations to delay the process."

If the number of debates on pricing, self-provision, inter-connectivity and more that have come before the SA telecoms regulator, Icasa, in recent months are anything to go by, then one can expect llu deliberations to increase its workload tenfold.

But Icasa shouln`t back down either. Introducing unbundling may be challenging for regulators where incumbents like Telkom have business models that are negative toward unbundling or new entrants do not have well co-ordinated and planned entry strategies.

This does not mean that unbundling should not be implemented, as the benefits outweigh the costs. Regulated cost-oriented unbundling has been very successful in markets like South Africa, where competition is not yet effective and where the facilities are essential bottlenecks that present a barrier to entry.

Unbundling can create incentives for new investment in broadband access and drive faster deployment of broadband services, because it allows less costly access to consumers for alternative broadband service providers.

However, critical issues needing to be considered by Icasa, in relation to unbundling, include co-location, provisioning time frames, service quality and access to operator systems. The key to success lies in balancing upside benefits with downside risks and costs.