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Cablegate: Telecom Liberalization Goes Rural

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 PRETORIA 004193

SIPDIS

SENSITIVE

STATE FOR AF/S/TCRAIG AND EB/CIP
COMMERCE FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
STATE PASS USTR FOR PCOLEMAN AND KSCHAAGIN

E.O. 12958: N/A
TAGS: ECPS ETRD EINT ECON SF
SUBJECT: TELECOM LIBERALIZATION GOES RURAL

REFTEL A) PRETORIA 4027

B) PRETORIA 4028

1. (SBU) SUMMARY. South Africa Minister of Communications
Ivy Matsepe-Casaburri has approved four under-serviced area
licenses (USALs) three years after the government first
announced its strategy to promote telecommunication services
in rural areas and include black entrepreneurs in a
traditionally high-cost industry. USAL bidders complain
that the Independent Communications Authority of South
Africa (ICASA) remains their biggest obstacle. Nonetheless,
there is reason to expect that ICASA will issue the rest of
the USAL licenses shortly. Industry observers expect
Casaburri to provide further clarification on the next phase
of USALs in October. END SUMMARY.

2. (U) In June, South Africa Minister of Communications Ivy
Matsepe-Casaburri approved several under-serviced area
licenses (USALs) to promote telecommunications services in
areas where less than 5 percent of the population has access
to a fixed-line telephone. The USAL operators will be
confined to limited geographical regions, but will be
allowed to offer an unrestricted range of voice and data
services. The announcement comes nearly three years after
government first introduced the concept of USALs as part of
a broad policy to bridge the digital divide among South
Africa's poor.

-----------------
USALs PROMOTE BEE
-----------------

3. (SBU) The Minister is awarding the USALs to black-owned
consortiums in line with Government's black economic
empowerment (BEE) policy. BEE seeks to transform South
Africa's economy by providing increased economic
opportunities for historically disadvantaged individuals
(HDI). During the first round of the USAL process, fifteen
applicants competed for ten licenses. Casaburri approved
licenses for Bokone Telecomms (Limpopo, Capricorn District);
Thinta Thinta Telecoms (KwaZulu-Natal, Ugu District);
Kingdom Communications (KZN, Zululand District; and Ilizwe
Telecoms (Eastern Cape, OR Tambo Municipality. She referred
another three back to the Independent Communications
Authority of South Africa (ICASA) for resolution of
shareholder issues. ICASA must now issue the licenses that
were awarded by the Minister. ICASA Manager for
Telecommunications Licensing Phineas Moleele told Econoff
that he hopes to finish negotiations with the operators in
time to issue the licenses by the end of September. A total
of 27 USAL licenses will eventually be awarded.

---------------------------
CHALLENGES FOR USAL BIDDERS
---------------------------

4. (SBU) In separate conversations, Kingdom CEO Sifiso
Mbatha and Thinta Thinta CEO Bule Mhlongo shared their
concerns and business strategies with Econoff. Both CEOs of
these BEE companies said that ICASA has been their biggest
obstacle. Mbatha said that the regulator's lack of capacity
and preoccupation with the Second National Operator caused
delays that have sapped Kingdom's limited financial
resources and facilitated increased market-share for
incumbent operators. Mhlongo also said that the delays are
making it increasingly more difficult to secure additional
financing for her efforts. She said that investor reticence
to provide open-ended financing and lender stipulations
requiring Kingdom to supplement loans with a portion of its
own money are threatening Kingdom's financial viability.
The CEOs also cite the difficulty in negotiating favorable
interconnection fees with South Africa's national cellular
operators as a critical factor affecting their
profitability.

--------------------
REASONS FOR OPTIMISM
--------------------

5. (SBU) Nevertheless, Mbatha and Mhlongo remain
optimistic. They expressed confidence that their business
models focusing on mobile and data services would pay off in
the rural areas. They say that local communities are
rallying behind them. Mbatha says locals have purchased
over 600,000 shares in Kingdom, generating nearly R400,000
(about $62,000). In addition, each USAL licensee will
receive R15 million over the next three years from the
government's Universal Service Area (USA) fund. Mhlongo and
Mbatha also said that the Industrial Development Corporation
(IDC) of South Africa may provide financing without the
strings required by other lenders. Mhlongo also pointed out
that the national carriers are not yet meeting universal
service obligations required by their current licenses. She
said national carriers see contracts with USALs to service
their existing customers and lines as a way to fulfill
universal service obligations. Mhlongo sees this as a way
to generate both revenue and leverage in her interconnection
negotiations with the existing phone companies. For their
part, phone companies see opportunities to increase profits
through roaming fees charged to USAL subscribers.

-------
COMMENT
-------

6. (SBU) Recent announcements at Transnet and the
Department of Communications regarding restructuring and
telecom liberalization, respectively, suggest Cabinet level
officials are increasing pressure to bring about change more
quickly (Refs A, B). This bodes well for companies awaiting
USAL licenses from ICASA. Industry observers expect the
Minister of Communications Ivy Matsepe-Casaburri to provide
clarification on the next phase of the USAL process in
October.

FRAZER

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