Here’s a story where no one comes out looking good. The story is telecommunications reform in South Africa. The cast is the ruling party, the government, rapacious foreign investors, a hapless under-resourced regulator, a well-paid trade unionist as well as “comrades” who were allowed to enrich themselves in the cause of black economic empowerment (BEE).
Robert Horwitz and Willie Currie conclude in a detailed analysis, which includes interviews with some of the key players, that 10 years on, reform has largely failed.
The key failure was to privatise before liberalising, the authors say in Another Instance Where Privatisation Trumped Liberalisation: The Politics of Telecommunications Reform in South Africa — A 10-Year Retrospective.
Reform mostly created huge profits for Telkom’s shareholders, notably SBC and Malaysia Telekom, at the expense of the wider economy.
“Telkom, granted a five-year period of exclusivity to expand the network, has used its monopoly power to thwart competition. It has raised prices so high as to be damaging to the economy.”
The report says that privatisation in South Africa has taken place in a political environment distinguished by the ANC’s project to create a national black bourgeoisie through BEE.
“The otherwise laudable goal of spreading economic opportunity and power to previously disenfranchised black South Africans coalesced with ANC [African National Congress] efforts to place comrades in the commanding heights of the economy and, correspondingly, a small number of well-connected comrades manoeuvring for major clout in the business world.
Trade unionist Tlhalefang Sekano, of the Communications Workers’ Union, was one of the leaders “romanced” (in the words of United States telecommunications giant SBC chief Jim Myers). This was seen as key to getting trade union support for the part sale of Telkom.
Sekano later became executive chairperson of the CWU Investment Company, a member of the board of Ucingo, which held 3% of Telkom’s shares for a time, and a board member of Telkom, earning R96 000 in fees annually between 2001 and 2004.
The government is criticised for both being policymaker and investor looking to do well from selling a stake in Telkom. It also did not provide adequate resources to Icasa for it to do its work.
Examples of ministerial interference include the intervention in Satra’s (precursor to Icasa) process to award a third cellphone licence in 2000, the cancellation of the Independent Communications Authority of South Africa’s (Icasa) draft regulations on interconnection that same year, and pressure on Icasa to approve Telkom tariff hikes in 2002 in order to protect the value of the company’s shares as the government embarked on a public offering of shares.
The regulator has been largely sabotaged by the government, in part due to the consequences of the haste to privatise, in part because the ANC leadership has been loath to trust democratic structures outside of its immediate control, the authors say.
“In short, South African telecommunications has been a sector plagued by poor policy and monopolistic behaviour.”
The report says, based on an interview with Myers, who headed SBC’s South African operations, that when SBC realised it was the only player left in the strategic equity partner bidding exercise, it temporarily transferred its entire San Antonio corporate legal team to South Africa to help draft the Telecommunications Act, to make sure the legislation fitted its requirements.
SBC was the lead investor, with Malaysia Telekom, in Thintana, which took up a 30% share in Telkom.
Thintana signed a shareholders’ agreement with the government that bound the government to terms rather favourable to the company.
“That document has never been released publicly — its contents remain unknown even to the regulator,” says the report.
SBC (now merged into AT&T) controlled Telkom by restructuring the key management committees and exercising voting supremacy within them. Myers told the authors that the shareholders’ agreement was never made public because some of its provisions bound the government so stringently and gave Thintana so much control that had they become public knowledge it would have raised huge outcry.
“Clauses in the shareholders’ agreement stipulated that once the Telecommunications Act was in place, neither Telkom nor Thintana would be compelled to follow any legislation that violated the shareholders’ agreement,” the report says.
Telkom’s annual reports show that the company paid Thintana a management fee of about R260-million a year in the middle years of its exclusivity period, representing about 16% to 17% of Telkom’s net profit.
Telkom spent billions installing new lines, but its “high prices for installation, rental and calls (and sociologically inappropriate billing mechanisms in rural areas) resulted in the disconnection of the vast majority of the new lines”.
While still director general of the Department of Communications, Andile Ngcaba devised a strategy to bid for Thintana’s shares if and when they came available, Myers told the authors.