Just say No to EASSy

 

by Roland H. Alden

 

African governments and global institutions like the World Bank are being asked to help finance another telecommunications project. This one is called EASSy (East African Submarine Cable System). While more and cheaper telecommunications is surely needed all across Africa , East African citizens would do well to ask their governments to take a step back from EASSy and find better ways to sponsor telecommunications projects that will result in real progress. As it stands today, EASSy could become a giant step backwards for Africa; and, with a US$200 million price tag, it has the potential of being an economic disaster Africa can ill-afford.

 

Nobody disagrees that the telecommunications capacity EASSy would bring to East Africa is needed; and nobody disagrees that EASSy would lower the cost of telecommunications for African citizens. So, what’s the problem?

 

First and foremost, EASSy is a joint venture between 20+ parastatial telecommunication bureaucracies that have, through gross levels of corruption and managerial incompetence, wasted the entire 20^th century bringing telecommunications in Africa to the dismal state it is in today. Entities like Telkom Kenya Limited and Telkom South Africa think EASSy is a good investment. And for them, it is. It is an investment in the early 20th century vision of telecommunications monopolies that keep prices high, and erstwhile competitors in court, or better yet, in jail. That, by the way, is not an exaggeration. In the last two years telecommunications entrepreneurs in several African countries, including Kenya and South Africa , have literally had to spend a night or two in jail because of anti-competitive agitation by Big Telecom, supported by government regulatory power.

 

Companies like MTN and Kenya Data Networks, which have done a great deal to bring private capital and entrepreneurial energy to telecom in Africa, should be ashamed of themselves for consorting with the collection of monopolists that form EASSy’s core support group. The reason they are involved at all is simple; survival. The parastatial telecommunication bureaucracies maintain a strong grip on the development of technology in Africa ; a grip that is entirely the doing of government. Unlike the vibrant technology sectors of computers and software, telecommunications is not driven by entrepreneurs and venture capital; it is driven by state regulatory bureaucracies that shakedown the industry for “licenses” to create and operate telecommunications networks. Try to operate a telecommunications company without paying for one or more of these “licenses” (they could also just be called “taxes” or “protection money”) to a government agency and you will find yourself in court in short order. Why do African governments treat the telecommunications industry as though we were selling drugs, or pornography, or firearms? Why? Because telecommunications, in the good-old-days, used to generate enormous hard-currency revenue, and African governments have always been good at getting their fair share.

 

But that was the last century. In the 21st century, which some politicians have failed to notice has arrived already, telecommunications is a highly competitive global technology, one where the primary product is access to the Internet; which is roughly the same thing as access to the entire world and all its knowledge.

 

It is no longer possible for African telecommunications companies to operate in economic isolation; it is no longer possible for them to generate giant profits that government regulators can “tax” to line their own pockets. Even twenty years ago this systemic thievery only amounted to a transfer of wealth from rich global multinationals, embassies, and various agencies of the United Nations; those who came to Africa in the last century did not mind making phone calls that cost $5 a minute, they were not spending their own money anyway. That view of the market persists to this day and projects like EASSy (and SAT3 in West Africa) are structured to work well in this kind of economic order. But, African entrepreneurs and African citizens can no longer afford it; and that kind of economy no longer exists.

 

Today’s user of Internet bandwidth in Africa is a student trying to learn, a farmer trying to sell food, and doctor trying to find the right diagnosis. EASSy would lower the cost of Internet access for these citizens by 50% to 75%. That sounds good, until you understand that by global standards it is shockingly inadequate. Internet bandwidth in Africa is not two or three times more expensive than in global competitive markets, it is 2000 or 3000 times more expensive.

 

The problem with EASSy is not technology; it is about ownership, finance and competition. EASSy is a “cartel” that aspires to be the OPEC of East African telecommunications. The members of this cartel have agreed not to compete with each other, and they are not going to allow competitors to join the cartel either. And, since they can’t raise enough money amongst themselves to build EASSy, they are going to ask African citizenry to pick up some of the costs. Understand that when such projects get a loan from the World Bank and other “donors” they are using credit created by the next generation of African citizens and taxpayers. This time, Africa should just say No.

 

Fiber optic “backbone” networks like EASSy are needed; but cartels like EASSy, Inc. are not. Africa should demand that their governments disband obsolete technology regulatory bodies that do more harm than good. Over 95% of the telephone lines that have been created in Africa in the last five years were created by entrepreneurial capital. These ventures could use some help from African governments; they need more deregulation, more regional coordination, electric power that is reliable, and various forms of financing and tax relief. Public financing should be used to level playing fields, create competition and lower costs for everyone. Public finance should not be used to pump money into a group of companies that want hold onto the last century’s vision of the telecommunications business. All around the globe telecommunications is one of the cheapest and most productive “natural resources” mankind has ever created. Africa needs its fair share, but it won’t be EASSy.

 

 

November 7, 2005

Roland H. Alden is a telecommunications consultant active in Africa and the Middle East; he can be reached at ralden@ralden.com.

 

Public Finance of Telecommunications

 

by Roland H. Alden

 

In an earlier essay on EASSy (the East African Submarine Cable System) I sharply criticized the EASSy consortium’s OPEC-like characteristics, and took the position that public money (and government regulation, which is a public resource) should not be used to finance telecommunications monopolies. But while it is easy to find fault with EASSy, and its already-built and dysfunctional sister project in West Africa called SAT3, it is somewhat harder to be clear and precise regarding exactly how these telecommunications projects should be structured.

 

In the last ten years Africa has seen a flowering of privately financed telecommunications ventures, so we can start with the most basic question: Why should public money be used, at all, to finance telecommunications? Let us admit that the answer may well be “it should not be used.” But we need to consider the facts. First of all, the only “flowering” Africa has really seen has been in the mobile telephone sector and this has been made possible in large part because of tremendous pent-up demand created by the existing “PTT” telecom monopolies (typically one per country) who have done such an abysmal job of meeting the needs of their customers. Anytime a business does a terrible job of serving its customers it creates a window of opportunity for certain competitive ventures. These mobile phone ventures have been fueled by some liberalization in the regulatory regimes in each country; but, this regulatory liberalization has been done badly in most cases; there are many loopholes that protect the PTT from certain kinds of competition, and many mobile operators are in violation of regulations because the economic consequences of obeying the law would be certain bankruptcy. It has been a great 10 years of telecom venturing for the private sector in Africa; but what has happened does not exactly add up to model public policy.

 

Mobile phones are only one form of telecommunications capacity; many others are needed. In order for Africa to develop and compete in the global economy of goods and culture, it needs high bandwidth networks capable of reaching the Internet, it needs urban and inter-regional and cross-border fiber optic networks, to tie together network islands and countries. It needs Internet exchange points where networks can efficiently exchange data with each other and allow a flow of ideas and transactions to occur across borders. It needs the costs for all these things to be as low as they are elsewhere in the world; so that African students, who do not have schools with many books, or many teachers, or any luxuries, can at the least have all the world’s knowledge at their fingertips. All these things are needed for Africa to aggregate the business and cultural opportunities of its many relatively small countries so that they can interact with the world as larger blocs with some power, and equipped with access to knowledge and information. If Europe needed the Euro then surely Africa needs regional organizations that really exist, function and make things happen. Strong telecommunications networks are a key enabler. Mobile phones everywhere are a first step, but they are not enough; not nearly enough.

 

Because the job is so large, and capable, wealthy and powerful private sector companies are so rare in sub-Saharan Africa , there is a strong temptation to ask governments and global financial institutions to do the “heavy lifting.” This is understandable, and may be justified. But, we must understand that in telecommunications in particular, there is a long and established tradition of such resources being used to support a single, unproductive, and corrupt monopoly company. It goes by different names in different countries, but it is known generically as the “telephone company.” To this day, the skeletons of these corporations, and the government regulatory bodies that oversee them, do continuous harm to the marketplace for telecommunications in Africa. They block the investment of private capital in order to insure that competition is restrained. EASSy is but one example of these forces at work.

 

If public resources are to be used to intervene in the telecommunications sector, what should the criteria for these investments and projects be? Surprisingly, the criteria are not terribly complex, and there are only three. Readers not familiar with the sector and its traditions will be surprised to know that almost any project on the table today, such as SAT3 and EASSy, violate all of the following “principles”.

 

Public money should be used to create resources that are open to all customers, including future customers who may not yet exist. When private capital creates a resource one of the forms of “Return on Investment” can be exclusion of future competitors. Private investors can give a price advantage to “early” customers or they can simply deny “late” customers a chance at all. Either form of exclusion is a fine strategy for private businesses investing private money. On the other hand, public money should be used to create opportunity, not exclude it or reserve it for a select group. To the degree that public money finances telecommunications, the network so created should be open to all customers, for all time, on equal terms. This does not mean early contributors of capital should not be paid a fair rate of interest for making their investment early, when risk is higher. It does mean that customers who come along five or ten years later should have access on terms that are determined by the global and regional economy as a whole. Fiber optic systems like EASSy in particular have very long operating life spans, 20 years or more, so they have the ability to grow their benefits to a region if given a chance; to have such a powerful resource controlled by a monopoly consortium is especially damaging.

 

Resources created with public money should be sold on a cost-recovery basis. Private investors in telecommunications seek a financial return (profit). They must charge the highest price they can get or they will eventually be pushed out by a competitor. Governments should endeavor to insure that private investors in telecommunications enterprises operate in a competitive market; that will hold prices down; but government should not regulate prices or regulate the market in other ways. Only the free market is powerful enough to defend the customer from the natural tendency for private companies to charge the highest price they can. Conversely, when public money is used to create telecommunications networks the situation changes; governments become active participants in the market; but the objective of government participants should not be to charge the highest price they can. The objective of investing public money in telecommunications should be to create the highest benefit to the citizens and economy as a whole. Government needs to satisfy “investors” too, but in different ways. Government needs to deliver results, not profits. Because telecommunications is a high-technology product, the cost of capacity-creation is constantly dropping in real dollars. Certain layers of the telecommunications business involve extremely high levels of technical skill and expertise, so it is never a good idea for government to try and run a telecommunications network. However, parts of modern telecommunications networks, such as fiber optic “backbones,” have all the physical and economic characteristics of roads and waterworks and other “heavy infrastructure.” They are the kinds of resources government can help finance without getting into something too complex for governments to manage. But to achieve maximum benefit these resources need to be made available. That means public money should not seek a financial return, but should buy the delivery of capacity into a fair market at the lowest price possible (which is a price that seeks to recover cost and no more). In fact, public money should not be involved unless the explicit outcome will be a reduction in prices to customers. If public money can’t deliver that, then we have to ask if the free market is not already operating efficiently and if there may be no role or need for public money. However, Africa is very far from this position today.

 

Public money should not be invested in markets that are distorted by anti-competitive regulatory regimes. As stewards of public money, governments should not invest resources in an environment where customers and competitors are not treated fairly by law. Unfortunately in every African country today telecommunications regulations are a systematic labyrinth of laws that create unfair advantages for certain companies, drive costs up for many companies, and drive costs up and deny service to almost all customers. Investment of public money into projects which must operate in these distorted “sub-economies” is a mistake; the vast quantity of telecommunications capacity created by a project like SAT3 or EASSy can only be productively sold in a fair and free market. Therefore, a precondition to large scale projects financed by global donor and World Bank money should be that governments clean regulatory house and create a business climate for telecommunications that is open and fair.

 

The last point may be the hardest for Africa. The web of advantages created by the regulators, advantages that accrue to employee unions, government officials, and a handful of selected companies, is so grossly unfair and economically distorted that the backlash will be severe for any government bold enough to try and dismantle this powerful bureaucratic apparatus. It is an indicator of how important telecom is to the economies of Africa that such interests have been created in the first place; and an indicator of how much creative energy might be unlocked when these corrupt and hegemonic structures are finally dismantled.

 

 

November 8, 2005

Roland H. Alden is a telecommunications consultant active in Africa and the Middle East; he can be reached at ralden@ralden.com.