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Cablegate: Firms Inch Closer to Acquiring Licenses to Develop National

VZCZCXRO0755
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #2665/01 3431159
ZNR UUUUU ZZH
R 081159Z DEC 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 6668
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 002665

SENSITIVE BUT UNCLASSIFIED
SIPDIS

DEPT FOR EEB/CIP/KATHERINE TOWNSEND
USTR FOR CATHERINE HINCKLEY

E.O. 12958: N/A
TAGS: ECPS EIND EINV EINT ECIP USTR SF
SUBJECT: FIRMS INCH CLOSER TO ACQUIRING LICENSES TO DEVELOP NATIONAL
WIRELESS BROADBAND NETWORKS IN SOUTH AFRICA

REF: A. PRETORIA 271, B. PRETORIA 1976, C. PRETORIA 1278

1. (SBU) Summary. U.S.-based DBI Broadband provided an update on
positive developments in the drawn-out, South African value-added
network services (VANS) license conversion process on November 28.
Minister of Communications Dr. Ivy Matsepe-Casaburri finally
conceded and announced that she would withdraw legal challenges to
the conversion process on November 21. The decision paves the way
for the Independent Communications Authority of South Africa (ICASA)
to complete the license conversion process by January 19, as
required under the Electronic Communications Act (ECA). ICASA has
already asked all interested VANS licensees to submit applications
by December 5 and is deciding on the final size (20 or 30 megahertz)
for the licenses. Industry officials are concerned about the size
and viability of the licenses and whether ICASA will complete the
licensing process in time to develop national networks for the 2010
FIFA World Cup. End Summary.

2. (SBU) U.S.-based and African-American owned DBI Broadband held a
teleconference with Commercial Counselor and State ICT Officer to
provide an update on progress with the South African VANS license
conversion process on November 28. DBI would like to develop and
operate a national wireless broadband (WiMax) network in South
Africa. In order to secure the spectrum to develop a WiMax network,
firms must first obtain an Individual Electronic Communications
Network Services (I-ECNS) license from ICASA. DBI executives also
sought U.S. Mission advice and support for their advocacy efforts.


--------------------------
MINISTER'S INTERFERENCE DELAYED CONVERSION PROCESS
AND HURT LIBERALIZATION
--------------------------

3. (U) Minister Matsepe-Casaburri announced that she would not
continue to petition the Supreme Court of Appeal against the
Pretoria High Court's August judgment in favor of Altech Autopage
Cellular after impeding the license conversion process through legal
challenges for months. The Pretoria High Court directed ICASA to
convert Altech's existing VANS license into an I-ECNS license
(Reftel B). The judgment also applied to all other similarly
situated VANS licensees, who were given the right to apply for an
I-ECNS or an Individual Electronic Communications Services (I-ECS)
license.

4. (U) Matsepe-Casaburri filed a Petition for Leave to Appeal the
August judgment, which was denied in October. She then sought an
injunction to prevent ICASA from issuing the I-ECS and I-ECNS
licenses. The injunction request was also denied, and the courts
granted Altech's request for an order to compel ICASA to
specifically issue the I-ECS and I-ECNS licenses. After losing this
series of legal challenges, the Department of Communications (DOC)
announced that she would not petition the Supreme Court of Appeal
"in the interest of the ICT sector".

5. (U) The DOC confirmed that if the Minister had continued with the
legal challenges, ICASA would have been unable to convert licenses
by January 19, as required under the ECA. This would have required
an amendment to the ECA to extend the conversion period, which could
have further delayed license conversion to the end of 2010. The
VANS license conversion process has already been delayed from the
original target of May 2008. According to the DBI executives,
lengthy delays would make it impossible for new national broadband
Qlengthy delays would make it impossible for new national broadband
operators to develop networks in time for the 2010 World Cup.
Lengthy delays would also allow the handful of existing broadband
operators to solidify their market share and continue to reduce
competition.

----------------------
ICASA FREE TO COMPLETE LICENSING PROCESS
----------------------

6. (SBU) According to DBI conversations with major industry players
such as Altech and Internet Solutions, these companies were
confident that the DOC would keep its word and allow ICASA to
complete the VANS conversion process by January 19. ICASA has
already asked all VANS licensees interested in license conversion to
submit applications by December 5, and to indicate whether their
network coverage would be national or provincial. ICASA would like
applicants to be able to begin network roll-outs within 12-months of
the license being awarded.

-------------------------
VIABILITY OF NEW LICENSES
-------------------------

7. (SBU) ICASA has 120 megahertz worth of spectrum for the I-ECNS

PRETORIA 00002665 002 OF 003


and I-ECS licenses and is planning to award six licenses worth 20
megahertz each. The goal is to allow more entrants into the ICT
market. However, DBI executives asserted that 20 megahertz is
insufficient to develop a national network. According to DBI,
additional spectrum is required to implement WiMax on a
national-scale with a customer base large enough to make it
economically viable.

8. (SBU) DBI executives explained that with 20 megahertz, a company
could only develop a limited provincial network, which would not
address the need to provide service to historically underserved
areas. They thought that a lot of operators "are blowing smoke at
ICASA about being able to service underserved areas, which is not
feasible with 20 megahertz." For example, many applications such as
Video on Demand are bandwidth intensive and a 20 megahertz license
would not be sufficient for a national network to adequately support
these applications.


9. (SBU) DBI executives also indicated that South Africa would not
be "overwhelmed by hordes of new network operators as result of the
license conversion process, given the high costs of building a
national broadband network in South Africa." Only well-funded
operators with solid business plans would be able to raise the
capital required to develop a national network. DBI estimated that
it would cost at least $200 million to build out a national wireless
broadband network, which is consistent with other public estimates.

----------------------
ICASA DEBATING SIZE OF LICENSES TO BE AWARDED
----------------------

10. (SBU) DBI executives said that some ICASA officials are
considering the alternative of awarding four licenses worth 30
megahertz each. However, ICASA Chairman Paris Mashile has not
completely consented to this alternative proposal. Some industry
leaders have made the business case to ICASA that 20 megahertz is
insufficient for national licenses. For example, Sprint has
compiled a total of 120 megahertz in the U.S. through acquisition of
smaller licenses (worth 10-20 megahertz each) to build its national
network.

11. (SBU) DBI executives were not sure whether Mashile was being
indecisive because of political or technical concerns. ICASA also
planned on requiring 51 percent Black Economic Empowerment (BEE)
equity ownership for new licenses to keep entrenched operators such
as government-controlled Telkom from acquiring additional spectrum.
Telkom already has 50 megahertz worth of spectrum that it is not
utilizing (Reftel A). However, this requirement also creates
market-entry challenges for foreign investors, and ICASA may be
softening its stance on the 51 percent BEE equity requirement. The
ECA made provisions for ICASA to set BEE ownership requirements for
new entrants at 30 percent or above, but there was no precedent for
a 51 percent (controlling stake) ownership requirement. (Comment:
Minister Matsepe-Casaburri also threatened a 51 percent local
ownership requirement on the landing of the U.S.-organized SEACOM
fiber-optic cable that will be arriving in South Africa next June.
SEACOM sold an additional 25 percent of its shares to South African
entities to accommodate this request believing that time was of the
essence and that a 51 percent local ownership was better than a late
arrival to the market. Reftel C. End Comment).

-----------------
INDUSTRY CONCERNS
-----------------
Q-----------------

12. (SBU) Industry representatives are joining together to develop
an advocacy plan to maintain pressure on ICASA to meet commitments
for license conversion and WiMax spectrum allocation. ICASA also
plans to complete the spectrum allocation process for WiMax by the
end of the first quarter of 2009. DBI is trying to finalize its own
strategy to secure a license. If ICASA decides to award four
licenses worth 30 megahertz each, the bidding process will become
more competitive. Executives are worried that BEE issues will drive
the licensing process and a small group with the right political
connections, but without the technical capacity to develop a
national network will acquire the license and then flip it for a
profit increasing the overall cost of the final licenses.

13. (SBU) DBI is also considering options to partner with other
licensees to develop a national network if ICASA winds up awarding
six licenses worth 20 megahertz each instead. For example, a
partnership between two licensees (who each receive a 20 megahertz
license) would result in a national network with 40 megahertz. DBI
is already working with Motorola on strategies to reach underserved
areas, but this strategy also requires the development of a broader
network with an urban presence to subsidize the service to

PRETORIA 00002665 003 OF 003


underserved areas.

---------------------
ADVOCACY AND QAINING
---------------------

14. (SBU) DBI is developing a Guideline Document to raise its
concerns regarding spectrum allocation with ICASA before ICASA
finalizes its own rules. DBI will send a draft of the document to
the U.S. Mission and other U.S. firms for endorsement. DBI
executives also emphasized that a round of technical assistance or
training from FCC or other international regulatory bodies on
spectrum management and allocation would be useful for ICASA
officials. ICASA has lost a lot of its expertise with staff
turnover and would benefit from a broader international perspective
on spectrum management and call termination pricing issues (Reftels
A and B).

15. (SBU) Comment. 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. Minister
Matsepe-Casaburri has consistently impeded liberalization in the
sector by delaying ICASA licensing processes and the launch of new
Africa-wide under-sea, fiber-optic cable projects with legal
challenges or requirements for majority local-ownership (Reftel C).
She appears to be relenting from her policy of "managed
liberalization" after a series of legal defeats and as pressure for
2010 preparations mount. Industry officials hope that a change in
government earlyQxt year will also bring new leadership to the
DOC, which would allow ICASA to operate more independently. New
entrants will bring much-needed competition to the South African ICT
sector, but DOC interference and ICASA delays will continue to
perpetuate high ICT costs. End Comment.

BOST

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