Viability eludes rural telecoms providers
November 19, 2006
By Thabiso Mochiko
Johannesburg - Two years after the government licensed seven consortiums to offer telecommunications services to rural communities, the country has yet to see the benefits.
The consortiums were tasked with rolling out cellular network services and internet to areas with a teledensity of less than 5 percent.
The seven underserviced area licensees (Usals) are Bokone Telecoms, to operate in the Capricorn district in Limpopo; Kingdom Communications and Thinta Thinta Telecommunications (T3), to cover the Zululand district and Ugu district, respectively, in KwaZulu-Natal; Ilizwi Telecommunications and Amatole Telecommunications for the Eastern Cape's OR Tambo and Amatole districts, respectively; Karabotel, to operate in central district of North West; and Bokamoso Consortium for the Lejweleputswa district in the Free State.
They were given R5 million each to set up the network. A further R10 million each is still pending.
A report by research firm BMI-Techknowledge (BMI-T) paints a gloomy picture of what the future looks like for the Usals.
The report, released last month, shows that of the six Usals that participated in the study, three have made a combined R2.4 million in revenue. Two did not disclose revenues and one was not available.
It has been more than two years and none of these Usals are close to breaking even. Experts say Usals, like other businesses, should be given eight years - five years to break even and three years to make a profit.
But without intervention from the Independent Communications Authority of SA (Icasa) and the Usals, "most may not survive", says BMI-T director Mandla Kuzwayo.
The Usals have 17 000 subscribers. Average revenue per user for the Usals' subscribers is R20.
"The Usals hope to go Ebitda positive in year-three is unrealistic," the report warns. Ebitda is earnings before interest, taxes, depreciation and amortisation. The Usals rely heavily on the business plans that were drawn up by consultants.
The Usals lack corporate governance and are in need of training and support at board and management level. Moreover, they are unable to attract third-party funding. The biggest problem is they cannot manage their own finances. Of the R35 million, R2.4 million was used for the business and network plans and the balance on working capital.
But it must be borne in mind that the licences were granted in areas other operators did not consider profitable and most if not all the Usals are run by small enterprises or previously disadvantaged individuals.
Given all these factors, the Usals can be blamed for their misery because they took this huge task with no clear understanding of how the telecoms market works. The government can also be blamed for licensing the Usals and leaving them to fend for themselves with no support.
Tebogo Khaas, the chairman of the SMME Forum, says the Universal Services Agency and Usals should do some introspection because at present the Usals "were set up for failure".
Lyndall Shope-Mafole, the director-general of the department of communications, says it is not fair that the Usals are set up for failure.
"The reason we have Usals is because the private sector does not want to operate in those rural areas because they are unprofitable."
The Universal Services Agency, which is tasked with funding Usals, admits that the Usals are struggling. It commissioned the study to avoid giving them a second tranche of the R35 million. "This was to ensure that we avoid giving the next tranche because it is taxpayers' money."
Telkom, MTN and Vodacom are cannibalising the Usals through roaming agreements. This is making the situation worse. It has prompted four Usals to form a shared service company, in which they will share infrastructure such as billing systems and network.
The chairman of the Usals Forum, Bule Mhlongo, says the problem with the government is that it does not know how to deal with the Usals.
"We don't feature anywhere Â… nobody knows where to fit us in," she says, adding that it is premature for Icasa to license other Usals in Mpumalanga, Limpopo and the Eastern Cape.
Critical to the Usals' success is the 800 megahertz spectrum allocation, which allows telecoms operators to offer wireless services. The spectrum is used for broadcasting purposes but Icasa is investigating the feasibility of allowing broadcasting and telecoms operators to share the spectrum.
Telecoms incumbents are making it harder for Usals to make profits because of the high interconnection fees they demand from them.
Icasa is negotiating an interconnection model for Usals.
BMI-T suggests that Icasa negotiates cost-based interconnection for the Usals. It recommends that the government increases the Usals' funding because with R5 million there is not much that they can buy. The funding is also taxed by the SA Revenue Service.
Another recommendation is the amendment of Usals' regulations. The government is urged to force the parastatals and municipalities to transfer their telecoms services to the Usals. This will be difficult since municipalities are considering entering the telecoms industry by partnering with value-added network service operators.
Shope-Mafole says the minister of communications, Ivy Matsepe-Casaburri, will announce a number of initiatives before the end of the year to help the Usals. In response to why the government does not implement training and marketing programmes for Usals as soon as they are licensed, Shope-Mafole says: "We can't foresee everything … we have to prioritise and there is so much to do at a particular time."
Universal Services Agency's board member, Bibi Khan, says the Usals issue is complex but not unique. "Without a viable source of funding and a viable business plan, Usals are doomed for failure."
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