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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?