Balancing Act (London)

31 January 2014

Africa: We Name the Guilty Men - Top Five Monopoly Incumbents That Keep Prices High and Stall Market Development

analysis

Because so many African countries have made huge strides over the last decade in developing their telecoms markets, it's easy to forget that the majority have stuck with the old monopoly incumbents. These state owned companies have kept prices high for customers and stalled the modernization of many African economies. Russell Southwood looks at why this happened and why it still matters.

A decade ago fierce battles were fought to get a number of Africa's state owned telcos into private hands and to strip them of their monopoly privileges. This happened in all but two of what are now Sub-Saharan Africa's most successful economies: Ethiopia and Tanzania.

These state-owned incumbent telcos stand in the way of developing a country's economy for a number of reasons. Almost without exception, they are poorly run and the quality of infrastructure and service they provide is sub-standard. Because they are monopolies, they keep prices high for other players in the market: places like Angola, Cameroon, Ethiopia and Djibouti have some of the highest international, national wholesale and surprise, surprise, retail prices on the continent.

Because they are owned by financially cash-strapped Governments, they are under-invested in and wages for their employees are often late. Chinese loans have helped with under-investment but cannot deal with the other problems identified here. Incumbents are significantly over-staffed and under-skilled. Hardly any one of them has a business strategy that is worth the paper it is printed on. Like the baobab tree, very little grows in their shade so they become the only pool for certain types of skills and these remain sub-standard.

The easiest part of the Gordian knot at the heart of the divestment problem is that Governments protect them because they fear what will happen if there are wide-scale redundancies. Therefore they are reluctant to remove the monopoly protection from them. In places like Mali, when there was more competition from Orange, Government Sotelma lost customers quickly and they largely stayed lost.

However, Governments like Kenya and Ghana that bit the bullet on this issue lived to see another day. Some like Nigeria have made such a mess of the process that they have lost most of whatever the value might have been of the assets of Nitel. Others like Niger and Zambia privatized only to see the collapse of Lap Green during the Libyan civil war mean that they had to re-nationalise. Zambia has held on to Zamtel because a new Government felt that the previous deal to sell was not at a fair price.

The trickier part of the conundrum is about politics. Often corruption extends back into the owners, the Government. Politicians have a nasty habit of treating these telcos as cash tills that could be dipped into, particularly at election time. In the case of Swaziland, the ownership is directly held by the King: why he should sell it off in those circumstances?

Where corrupt money is not involved, patronage has gone a long way to help wreck what efficiency might notionally exist. Everybody's brother who is connected potentially gets a job and the management jobs are plum positions under political control in many countries.

African politicians would like to persuade us that state telcos are a key part of closing the digital divide and joining the information societies. Because the rhetoric is warming and positive in intent, does not mean that we should believe them. All the countries identified below are lagging behind in closing the digital divide.

One of the key issues in African telecoms liberalization has been the way that state monopoly incumbents hold up the development of a more complex, higher skilled market. If the incumbent sells wholesale capacity to local ISPs, you can be sure that its employees are going to those ISP customers and trying to poach them. Furthermore, these kind of state companies have no idea of the cost of providing wholesale capacity for two reasons: firstly, they lack the commercial ability to work it out and secondly, there is no benchmark price in the market.

To tackle this problem, a number of Governments have taken the sensible step of separating wholesale and retail functions. Ghana Telecom was sold on the basis that this had to occur and though we were skeptical, it has worked better than we thought. Botswana has done the same with BTC whilst holding on to both parts.

Also the World Bank has sponsored and helped financed operator consortia to eat away at the more egregious of these monopoly privileges like landing stations and national networks (as in Burundi).

So there are 31 countries where there is a state owned incumbent telco that is either dominant or has monopoly privileges that hamper the growth and efficiency of the market. These are: Algeria; Angola; Benin; Burundi, Cameroon, Central African Republic, Chad, Comoros, Congo-Brazzaville, DRC, Djibouti, Egypt, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Libya (which has several state entities), Mali, Mozambique, Namibia, Niger, Sao Tome, Sierra Leone, Swaziland, Tanzania, Zambia and Zimbabwe.

Several of these countries are in political turmoil that makes it imposible to do anything about privatizing the incumbent telco. Others like Comores are going through the privatization loop again.

Below is our Top 10 that should be privatized in countries where it would have a huge impact:

1. Ethiopia: It is the North Korea of telecoms regulatory practice and maintains that what is now called EthioTelecom plays a crucial role in closing the digital divide. Its equipment and network procurement has been a mess and even with Chinese loans, it is still serving less customers than it might if it were in private hands. Prices remain high and market development was not helped by things like the ban on SMS for several years. It remains, more or less, the only company in the market whereas other more open economies have seen jobs and skills flourish. Rather cheekily, we're going to add their traditional enemy Eritrea in here as it is the only telco without an international fibre landing station or any plans to build one.

2. Mozambique: It is currently going through a phase of talking about privatizing but don't hold your breathe. Incumbent telco TDM retains a number of monopoly market privileges and charges neighbouring countries high transit prices for access to international fibre capacity.

3. Cameroon: There was one attempt to privatize Camtel and either the Government didn't like the price or no-one came to the party. Despite the huge amount of pride some Cameroonians still have in Camtel, it is hugely inefficient and its monopoly control of both the landing station and national fibre networks mean prices are higher than they should be. It refused World Bank money to create a national wholesale fibre consortium and its market development has been delayed by not dealing with this issue.

4. Namibia: Telecom Namibia is one of those cozy unnoticed monopolies. The country is small and has a relatively high standard of living compared to many of its neighbors. It has a relatively well-equipped national infrastructure but keeps national wholesale prices high. In an act of hubris it had a commercial strategy to get involved in neighbouring telcos in Angola and South Africa. Like the investments of South Africa's Telkom, these were without exception a disaster.

5. Zimbabwe: It hasn't been for want of trying as the endless stream of rumors about potential buyers show. But the recent spat about whether an ISP can run VoIP services shows that there are still red lines in what is now otherwise a competitive market. The issue here is that the Government clearly wants more money than potential buyers are willing to pay. Something has to give and it's probably the Government's negotiating position.

Privatizing a state owned telco in the African context is about a Government making a commitment to having an efficient economy that will produce sustainable jobs. If it can't make that commitment, what's the point of all the warming blah, blah at the international conferences about them becoming information societies?

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