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Let’s not be narrow-minded about broadband

The government’s plan to create a state-controlled company, Infraco, to drive down telecommunication costs and improve broadband internet access has, predictably, come under fire from free marketers. What we need, writes Duncan McLeod in the Financial Mail, is less state interference in the telecommunications sector, not more (read McLeod’s column). This strikes me as a narrow-minded approach.

The idea is that Infraco will spend R5-billion laying new high-capacity submarine cables linking South Africa with South and North America and Europe, and then lease capacity to commercial firms at low cost, opening up the sector for competition and laying the foundation for private sector investment. In theory, writes McLeod, this should work. In practice, “the idea is flawed and could inflict long-lasting damage on SA’s telecom industry”. Infraco will “chase away foreign investment by building infrastructure and offering access to it at prices with which the private sector can’t compete”.

I’m not so sure that there are foreign investors lining up to build the kind of infrastructure that Infraco will provide, and even if there are, by McLeod’s own admission they won’t be able to supply services at the same low cost as Infraco. So that argument, to me, doesn’t make sense. This idea that the private sector always delivers more efficiently than the government should be interrogated.

The Princeton economist Paul Krugman, writing in the New York Times (read it; Times Select subscription needed), tells a story that that those who advocate free-market solutions for South Africa’s broadband future should heed.

During the Clinton boom, the United States led the world in becoming connected. But as the internet evolved, and especially as dial-up gave way to high-speed connections, the US has fallen behind. Far behind. In 2001, Krugman writes, the percentage of the population with high-speed access was twice as high in the US as in Japan and Germany, and four times as high as in France; by 2006, all three those countries had overtaken the US.

In addition, “high speed” connections in the US are, says Krugman, “painfully slow” in comparison with other countries. French broadband connections are on average three times faster, and Japanese connections 12 times faster. What’s more, broadband access in both those countries is “much cheaper” than in the US. The result is that the US lags behind in new technologies that depend on broadband internet access. The US doesn’t even make the top 10 list of countries with subscribers to internet television; France leads the way.

How did the US fritter away its internet lead? Bad policy, Krugman argues. “Specifically, the United States made the same mistake in internet policy that California made in energy policy: it forgot — or was persuaded by special interests to ignore — the reality that sometimes you can’t have effective market competition without effective regulation.”

Efforts by the Clinton administration to ensure open competition in the sector by forcing local phone companies to act as common carriers, allowing competing service providers to use their lines, came to naught, Krugman writes. Politicians who argued for regulation, such as Al Gore, were likened in the pages of the Wall Street Journal to small-minded French bureaucrats.

“The digital robber barons were basically set free to do whatever they liked. As a result, there’s little competition in US broadband — if you’re lucky, you have a choice between the services offered by the local cable monopoly,” writes Krugman. “The price is high and the service is poor, but there’s nowhere else to go. Meanwhile, … the real French bureaucrats used judicious regulation to promote competition. As a result, French consumers get to choose from a variety of service providers who offer reasonably priced internet access that’s much faster than anything I can get, and comes with free voice calls, TV and Wi-Fi.”

He concludes: “It’s too early to say how much harm the broadband lag will do to the US economy as a whole. But it’s interesting to learn that healthcare isn’t the only area in which the French, who can take a pragmatic approach because they aren’t prisoners of free-market ideology, simply do things better.”

Now South Africa isn’t the US or France, but there’s a lesson in that. Rather than a knee-jerk response of “the less government, the better”, perhaps we should be pragmatic. The private sector’s track record in, for example, the cellphone industry or financial services does not inspire confidence: we have among the most expensive cellphone and banking services in the world.

If it is about providing the cheapest and most efficient broadband access to the most people possible, and the state can do that better than the private sector, why not?

Author

  • Robert Brand teaches media law, ethics and economics journalism at Rhodes University. Before joining academia, he worked as a journalist for the Pretoria News, the Star and Bloomberg News.

10 Comments

  1. Oupoot Oupoot 28 August 2007

    Just wish they would follow their own rules about establishing Infraco. It appears to be a knee jerk reaction to the lack of proper competition in the telecoms market. However, your argument is further supported by commentary on VoxEU about competition in public services.

  2. Paul Paul 28 August 2007

    Except… There’s one fatal flaw in your argument. The Department of Communication, who would play a large part in driving any public initiatives, are all incompetent buffoons. Witness everything that falls under their domain: The post office, the SABC, Telkom, Sentech. We’re in the current broadband mess because of them.

    PS. when it comes to internet rates over cell phone, we’re probably the cheapest in the world…

  3. Graeme Graeme 28 August 2007

    I agree with your article. The only problem is if the government runs this as a business for profit – there will be nothing to stop them hobbling the competition with regulation in order to get to the top. As long as it remains true to it’s intention, meaning providing cheaper and better broadband, this could be a great step forward.

  4. Henk Kleynhans Henk Kleynhans 28 August 2007

    I agree with Graeme here. Not because of nothing stopping them, but because they’re already blocking Seacom from landing a cable here, claiming that it must be “more locally owned”.

    (Seacom is one of the foreign investors who is lining up!)

    Which could possibly be interpreted that Infraco be one of the owners before the DoC gives approval to Seacom

  5. Vincent Maher Vincent Maher 29 August 2007

    @Graeme: surely it should be the other way around – that the regulation hobbles Infraco and that a combination of the Competition Commission, ICASA and the DoC provide enough avenues of appeal if something goes wrong?

  6. Debbie2 Debbie2 31 August 2007

    So long as government has significant ownership of the sector they have the incentive to regulate (or not regulate) according to their interests.

  7. Robert Brand Robert Brand Post author | 31 August 2007

    That’s not necessarily true, Debbie. Government may have an incentive to regulate (or not to regulate) in the interests of the people they represent. Let’s not be cynical!
    Or if you want to be cynical, you may as well say that the private sector has an incentive to conduct its business in its own interests.
    Robert

  8. Henk Kleynhans Henk Kleynhans 31 August 2007

    Robert, it’s not cynical to say that the private sector has incentive to conduct business in its own interests.

    The point of private business is to provide a service in return for money. If private business is free to compete in an environment that is regulated fairly, prices will go down and service quality will increase.

    Having taxpayers foot the bill for a government owned ‘competitor’ in the sector while government at the same time restricts companies from freely providing services to customers is definitely not in the interest of the people it represents.

  9. Robert Brand Robert Brand Post author | 31 August 2007

    Henk, what I’m arguing against is the knee-jerk respsonse of “private sector always better, government always inefficient”. I agree that if private business is free to trade in an environment that is regulated fairly, prices MAY go down and service quality MAY increase. That is not always the case, though, and the converse – that when government runs the show, it is always inefficient – is not always true either.

  10. Debbie2 Debbie2 31 August 2007

    I’d prefer to refer the cynicism as ‘hard learned lessons’.

    Robert, your line of reasoning about the provision, ownership and control of telecoms networks went out of fashion in the 1980s for a reason; McLeod’s reaction of ‘less government’ in this instance is reasoned- it’s not because it’s a knee-jerk response.

    Let’s take a look at some of the facts relevant here. You propose continuing a situation where there is a common chord resonating between “Policy Maker->Service Provider”. In the case of SA, there are too few entities in control- financially/politically. McLeod’s argument is to avoid strenthening these chords of interest that run thick in SA telecoms, even to the point where Policy Maker->Service Provider->policy-implementer (‘Regulator’):
    – A former ICASA Chair makes a sworn statement to the effect that he was basically instructed by govt to grant govt’s favoured candidate the licence in the Cell C licencing debacle
    – Govt hold Six out of Ten seats on Telkom’s board (remember Papi’s abrupt departure?)
    – The current Council of ICASA is made up of a handful of ex-DoC officials, some of the others were nominated by telecoms companies. Telkom oversaw the interviewing process.
    – “Just because it has the word ‘independent’ in it’s name doesn’t mean it is” – current DoC Director-General (from the horse’s mouth)
    – Ivy basically gets to pick who sits on the regulator’s Council, with some minor legal obstructions which dress the process up in cursory democracy. Her powers have been eroded a little over time though- although at every turn Ivy has fought hard to wrest democracy from the people and INCREASE her personal power over selections.
    – The audacity of Section 45A of the Telecoms Act Amendment Act(it expanded Minister’s powers- who’s powers by then far exceeded that as prescribed in the White Paper policy)
    – The regulator’s abrupt, corrupt u-turn on the ADSL regulations (it’s been four years in all now, and we’re still waiting for significant action from the regulator)
    – The DoC’s fierce oppostion to the proposal to entrench ICASA as a chapter 9 institution, which would ensure the regulator’s independence in the Constitution
    – The insiders point in unison to Ivy as the source of our ongoing woe
    – Andile Ncaba, former director-general, makes millions (or is that billions?) from Telkom shares
    – When will we ever see a complete copy of the Strategic Services Agreement concluded between Telkom, the Minister and Thintana? Why does the ministry continue to sit on this?
    – Government already holds 39% of Telkom, plus more of Telkom through government-linked connections such as the Public Investment Corporation, various BEE animal consortiums; PLUS an indirect 50% of Vodacom through Telkom; plus whatever they have in Neotel; plus another 100% of Sentech.
    – Why can’t journalists and shareholders obtain a copy of Telkom’s Register of Members from Proes Straat?
    – Ivy and the DoC are charged with managing certain state assets- no doubt Infraco will fall under dear Ivy’s domain (as does Sentech and Telkom already). There are contradictory obligations that arise from this: Ivy inc. is charged with maximising the value of state assets As Well As carrying out the more social, democratic obligations of the ministry (i.e. wider access to communications; looking after the communications sector as an integral part of our economy; lowering prices; etc). [Not long before before Telkom listed, our independent regulator allowed Telkom to push a huge and probably illegal (according to regulations) price increase through.]

    Infraco… come, really now? Rather government should let go of their shareholdings in telecommunications, thus incentivising good regulation, thus incentivising healthy competition.

    It’s not cynicism and it’s not a knee-jerk reaction, it’s a reasoned response informed by observation.

    With regards to-
    “The private sector’s track record in, for example, the cellphone industry or financial services does not inspire confidence: we have among the most expensive cellphone and banking services in the world.”

    On the contrary with regards to the cellphone industry’s track record. The private sector (or cynically, the ‘semi-private sector’) has done wonders in the cellular industry in expanding simple access. Horwitz and Currie’s recent article in the journal Telecommunication Policy agree that until now, our telecommunications policy outcomes have been “at best a bare success”… and that it is cellular which has been the (almost serendipitous) saving grace of government’s poorly implemented telecommunications policy. Price-wise cellular rates could be lower, no doubt. However what SA may have lacked in cellular price decreases was counter-balanced by the mobile networks’ innovation (pre-paid cellular, that now spans the globe and gives basic access to hundreds of millions of people, was ‘invented’ in SA), good use of technology (97-98% of our country is covered by GSM), speedy deployment of 3G and HSDPA (launched here second in the world, I believe?).

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