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Cablegate: Foreign Operators and Privatization Increase Competition In

VZCZCXRO2816
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2280/01 3130707
ZNR UUUUU ZZH
R 090707Z NOV 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0145
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1041
RUEHNE/AMEMBASSY NEW DELHI 0641

UNCLAS SECTION 01 OF 03 PRETORIA 002280

SENSITIVE BUT UNCLASSIFIED
SIPDIS

DEPT FOR EEB ALAN GIBBS
STATE PASS TO USAID

E.O. 12958: N/A
TAGS: ECPS EIND EINV EINT ETTC EAID SOCI SF
SUBJECT: FOREIGN OPERATORS AND PRIVATIZATION INCREASE COMPETITION IN
ICT SECTOR, SAG STILL FAVORS PARASTATALS

REF: A. 09 STATE 2164
B. 08 PRETORIA 1278
C. 09 PRETORIA 249
D. 09 PRETORIA 1033
E. 09 PRETORIA 2194

-------
SUMMARY
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1. (SBU) Neotel executives briefed Ambassador Gips on the creation
of the second fixed-line operator on October 27. Neotel began
operations in 2005 and is working with new undersea fiber-optic
cable companies to boost broadband capacity in the region. Neotel
executives outlined impending changes in the South African
Information and Communication Technology (ICT) regulatory
environment under the Zuma administration. The SAG will have to
consider providing incentives to private operators to improve rural
network coverage and service delivery. Separately, Econoff attended
Neotel's second Telecommunications Academy graduation on October 30.
Neotel hopes to expand the number of trainees it can accommodate at
its academy and is pursuing partnerships to secure employment
opportunities for its graduates. The pace of liberalization in the
ICT sector and the entry of new foreign operators and undersea cable
projects has begun to improve ICT capacity in South Africa. The
propagation of parastatal entities under the Mbeki administration
did not improve service quality or delivery, but industry analysts
do not expect the SAG to abandon state champions such as Telkom or
Broadband Infraco. End Summary.

-------------------------
NEOTEL BRINGS COMPETITION
TO TELKOM'S MONOPOLY
-------------------------


2. (SBU) Neotel Chief Technology Officer Dr. Angus Hays and Head of
Regulatory Affairs Dr. Tracy Cohen briefed Ambassador Gips on the
creation of the second fixed-line operator on October 27. Neotel
began operations in December 2005, after lengthy delays in South
Africa's implementation of liberalization policies outlined in the
Telecommunications Act of 1996. Neotel's original shareholders
included state-controlled power utility Eskom (15 percent) and
state-controlled transport logistics group Transnet (15 percent).
Neotel began building its network from Eskom and Transnet's existing
fiber connections. Dr. Angus Hay explained that Neotel is currently
the only operator in the sector not to have direct SAG ownership.

3. (SBU) In January 2009, the SAG approved the sale of existing
Eskom and Transnet share's to Neotel's parent corporation,
India-based Tata Communications. This decision allowed Tata to gain
a controlling share (56 percent) of Neotel. According to Hays, Tata
considers South Africa as its second home market after India. Black
Economic Empowerment (BEE) partners hold 19 percent of shares; some
are well connected politically. The remaining shares are held by
private consortiums.

4. (SBU) Neotel is expanding its network and has focused on building
its business around larger commercial customers. Neotel also has
plans to bring fiber connections directly to consumers' homes.
Neotel was a facilitator for the SEACOM undersea fiber-optic cable
when other South African companies would not support a private cable
project (Ref B). Neotel worked with SEACOM to extend the fiber
connection from the landing site in KwaZulu-Natal Province to the
country's industrial hub in Gauteng Province. Hays explained that
the threat of piracy on the Gulf of Eden and some political
interventions delayed the launch of SEACOM by a few months. Hays
Qinterventions delayed the launch of SEACOM by a few months. Hays
commented that it was politically expedient to blame piracy concerns
for all of the delays. The piracy threat has also affected the
other pending undersea cable projects. The projects have had to
depend on patrol/escort support from the U.S. and French navies
since the main suppliers are French-American company Alcatel-Lucent
and U.S.-based Tyco Telecommunications.

5. (SBU) Dr. Hays said Neotel's comparative advantage includes its
ability to tap into Tata's existing global network, including the
SAFE/SAT-3 satellite network. Neotel is also promoting the
development of other undersea cable projects including EASSY (East
Africa) and WACS (West Africa), which are expected to further boost
bandwidth capacity in Africa. According to Hays, EASSY is expected
to begin operations in mid 2010.

6. (SBU) Neotel is also working with existing mobile operators MTN
and Vodacom to boost network capacity around the major metro

PRETORIA 00002280 002 OF 003


centers. They are collaborating to build 5,000 km of additional
fiber capacity and there is some tower sharing among the three.
Neotel has also considered acquiring mobile operator Cell C, but
Hays indicated that the "debt on Cell C is too high to consider it
viable unless there was a fire sale."

------------------
LEADERSHIP CHANGES
EXPECTED AT ICASA
------------------

7. (SBU) Dr. Cohen, a former Independent Communications Authority of
South Africa (ICASA) Councilor, explained that ICASA was developed
with some USAID and Canadian Aid assistance. Therefore, it is
partially based on the U.S. Federal Communications Commission and
Canadian regulatory models. ICASA has approximately 300 staff
including its regional divisions. ICASA councilors serve staggered
four-year terms. ICASA's CEO is appointed for a five-year term.
The Minister of Communications makes the appointment based on
Parliamentary advice. However, independence constraints and
interventions from the Department of Communication (DOC) impeded
ICASA's decision-making processes in the past (Ref C).


8. (SBU) Neotel executives said ICASA's leadership structure would
change drastically in the next year. Last minute labor and ICASA
interventions (Ref D) in the Vodaom-Telkom dissolution made ICASA
look bad. Major executive changes were expected to deal with the
resulting public backlash. Dr. Cohen said there is strong
indication that the next ICASA CEO would not be a political
appointee, but someone with technical expertise in the sector. She
expected this to offset the lack of technical expertise possessed by
the current Minister of Communications General Siphiwe Nyanda. In
Cohen's view, the current ICASA CEO Paris Mashile, a political
appointee, became difficult for the SAG to control.

9. (SBU) Dr. Cohen welcomed U.S. technical assistance in the sector
and said ICASA would benefit particularly from technical assistance
on spectrum management. She explained that the Parliamentary
Portfolio Committee on Communications is extremely receptive to
technical assistance and has been active in improving the
legislative and regulatory climate. She suggested that the USG
should consider working with Parliamentary Portfolio Committee's
Chairperson Ismail Vadi to promote liberalization and improve
technical capacity in the sector.

------------------------
POLICY BOTTLENECKS STILL
THWART COMPETITION
------------------------

10. (SBU) Dr. Cohen noted that the DOC is also trying to "claw back
some power" from ICASA on regulatory issues. In the past, ICASA has
been criticized for pursuing lengthy market studies that have slowed
down decision making on ICT regulatory issues. In the current
economic climate, Neotel executives expected less appetite for
additional process-oriented decision-making. Instead, they expected
Ministerial edicts on issues such as rate determinations for
interconnection and call-termination fees.

11. (SBU) Neotel executives also emphasized that the SAG would
continue to protect government-controlled entities such as Telkom,
despite allowing foreign operators limited access into the sector in
the last few years. Telkom is the country's flagship ICT company
and the DOC has direct influence over its CEO. They cited continued
SAG support for state-owned signal carrier Sentech as another
QSAG support for state-owned signal carrier Sentech as another
example. Sentech was designed to be the SAG's wireless operator,
and takes up a large share of scarce spectrum capacity (50
megahertz) without producing much results. General Nyanda wants to
continue supporting Sentech because it reports directly to the DOC.
Similarly, the parastatal company Broadband Infraco, created to
develop undersea broadband cable capacity, was slated to be
incorporated into the second fixed-line operator once Neotel was
licensed. However, that did not occur because of tensions between
the DOC and the Department of Public Enterprises (DPE). DPE has
some oversight on parastatal entities (Ref A), and tensions continue
to rise over control of Broadband Infraco.

----------------
RURAL COVERAGE
STILL INADEQUATE
----------------

12. (SBU) Dr. Hays explained that South African operators have

PRETORIA 00002280 003 OF 003


traditionally focused their network development strategies on urban
areas due to commercial viability issues. The challenge for the SAG
and operators is to extend network service to rural areas. Dr. Hays
noted the critical need to find a viable model to promote rural
network rollouts, which are required to improve service delivery.
He explained that the SAG has avoided the use of incentives, but
emphasized that financial incentives are required to encourage
network development in rural areas that would be unprofitable
initially. A SAG-controlled entity, the Universal Service and
Access Agency (USAA), was launched in 2002 to address country-wide
access constraints, but policy bottlenecks have rendered it
ineffective (Ref A).

13. (SBU) A digital dividend is expected from the impending digital
migration. Dr. Hays said 80-100 megahertz of spectrum would be
freed up from the digital migration and could be put to good use to
improve rural coverage if there is political will. The SAG
originally announced the digital migration process to be completed
by November 2011, but Neotel executives thought that late 2012 was a
more realistic timeframe. The DOC recently released a new policy
spectrum allocation, which Neotel executives described as weak on
specifics.

------------------------
NEOTEL ACADEMY ADDRESSES
SKILLS SHORTAGE
------------------------

14. (SBU) ICT Officer attended Neotel's second Telecommunications
Academy graduation on October 30. Neotel launched the academy in
2007 with 10 students as a pilot program. The full academy was
launched in March 2008 with 27 students enrolled. Neotel CEO Ajay
Pandey described the initiative as an effort to "build a gene pool
of local ICT expertise." Neotel worked with the SAG's Information
Systems, Electronics, and Telecommunication Technologies Sector
Education Training Authority (ISETT-SETA) and international ICT
companies such as U.S.-based Cisco to develop the curriculum for the
academy and offer post-training employment opportunities. Pandey
and the Deputy Minister of Communications emphasized the need to
build R&D capacity within South Africa. The Neotel Academy was
cited as a potential first step to encourage trainees to pursue
additional graduate and post-graduate studies in this sector.
Increasing PhD-level expertise within South Africa was cited as a
requirement to remain globally competitive.

15. (SBU) Neotel recruits trainees from historically underprivileged
backgrounds, and the trainees receive stipends for living expenses
during the program. Seventeen trainees successfully completed the
program this year. The one-year training program builds on basic
engineering qualifications. This year's trainees spent time at
Tata's operations in India to increase their global exposure. Tata
has also extended an offer to receive future trainees at its other
global operations. China-based Huawei has also offered employment
opportunities to the graduates. Pandey noted that he would pursue
further corporate partnerships to secure employment opportunities
for future graduates and also welcomes support from donor countries
to expand the number of trainees it can accommodate.

--------
COMMENTS
--------

16. (SBU) The pace of liberalization in the ICT sector and the entry
Q16. (SBU) The pace of liberalization in the ICT sector and the entry
of new foreign operators and undersea cable projects has begun to
improve ICT capacity in South Africa. Broadband capacity and costs
have improved in the last year, but are not yet meeting global
standards. Increased capacity in the sector will help SAG meet some
of its commitments to FIFA for the 2010 World Cup and boost economic
development as more medium and small businesses can begin launching
e-commerce services. Companies such as Neotel, Cisco, and Microsoft
have developed programs and academies to improve local skills
development, but these are still small-scale projects. ICT network
coverage in rural and historically disadvantaged areas also needs
improvements. The SAG will have to consider providing incentives to
private operators to improve rural coverage and service delivery.
The propagation of parastatal entities under the previous
administration has not improved service quality or delivery in the
sector, but industry analysts do not expect the SAG to abandon state
champions such as Telkom or Broadband Infraco. End Comment.

Gips

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