Identifying key regulatory and policy issues to ensure open access to regional backbone infrastructure initiatives in Africa

Transcription

1 Identifying key regulatory and policy issues to ensure open access to regional backbone infrastructure initiatives in Africa Submitted to: The Global ICT Policy Division (CITPO), World Bank Prepared for: The e-africa Commission Submitted by: Paul Hamilton and TeleGeography 9 December 2004

2 ICI Policy and Regulatory Study - Africa Disclaimer: the findings, interpretations and conclusions expressed in this report are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of its Board of Executive Directors or the countries they represent. Information contained within this report is based on sources believed to be reliable and every effort has been made to ensure that it is as accurate and up-to-date as possible. The report was funded by the Global Information Communication and Technologies Policy Division (CITPO) of the World Bank. We would like to thank all those who gave freely of their time and ideas and hope that in the short time available justice has been done to them. 2

3 ICI Policy and Regulatory Study - Africa Contents Introduction Background Executive summary Part 1: Analysis Licensing of international facilities Eligible Operators Liberalisation of International Segment Settlements for International Traffic Voice over Internet Protocol Barriers to access Ownership structure of EASSy and other regional backbone infrastructure projects Cross-border interconnection Structure of East African Interconnection Arrangements Rights of Way for Landlocked Operators Status of Claims Regarding Territorial Waters Backhaul Charges for Carriage Through Intermediary Country International Monopoly in Gatekeeper Countries Can Create Severe Bottleneck. International Circuit Pricing Sat-3/WASC Pricing Experience of Sat-3/WASC non-member access to cable Non-member access to Sat-3/WASC Part 2: Conclusion Preliminary Recommendations Part 3: Country Case Studies Ghana Kenya Nigeria Senegal South Africa Tanzania Uganda Part 4: Annexes 3

4 ICI Policy and Regulatory Study - Africa Annex 1: Terms of Reference Annex 2: United Nations Convention on the Law of the Sea (UNCLOS), Ch 10. Annex 3: Profile of Sat-3/WASC, TeleGeography Annex 4: Profile of Proposed EASSy, TeleGeography Annex 5: NITEL International Gateway Licence, NCC Annex 6: Sentech International Telecommunications Gateway Service Licence (2002), ICASA Annex 7: Kenya Telecommunications Policy (2001), CCK Annex 8: International Traffic Data (1998 and 2002), FCC List of Tables Table 1: Liberalisation of International Segment Table 2: Settlements for International Traffic between Selected African Countries and US Carriers, 2002 Table 3: Sonatel Successive VoIP Strategies. Table 4: Ownership Structure of Submarine Cable Systems Table 5: Sender Keeps All Interconnect Regime Table 6: Structure of East African Interconnection Arrangements Table 7: United Nations Convention on the Law of the Sea (UNCLOS) Table 8: Sample Backhaul Charges Table 9: Factors Determining Submarine Cable Prices Table 10: Owners of Sat-3/WASC/SAFE Table 11: Discussion Document for Ghana Telecommunications Policy Table 12: Resolution of Interconnect Disputes, Ghana Table 13: Declining revenues from international telephone calls because of shift to voice-over-internet, Ghana Table 14: Telecommunications and Postal Sector Policy Statement (April 1999), Kenya Table 15: Projects Undertaken , Telkom Kenya. Table 16: Interconnection Disputes, Nigeria. Table 17: International Links, Senegal Table 18: Bilateral International Links, Tanzania Table 19: Background to Celtel Interconnect Dispute, Uganda. Table 20: Bilateral International Links, Uganda Table 21: UTL Celtel Interconnection Dispute, Uganda List of Charts Chart 1: Comparative Cost of 256 Kbps Circuit, 2003 Chart 2: Sat-3/WASC Pricing, 2002 and 2003 Chart 3: Kenya International Voice Traffic, Chart 4: Hierarchy of Internet Service Providers, South Africa 4

5 ICI Policy and Regulatory Study - Africa Introduction This report was commissioned by the Global Information Communication and Technologies Policy Division (CITPO) of the World Bank in June It provided inputs into a conference convened by the NEPAD e-africa Commission in Johannesburg (South Africa) from July 2004 to review the status of all current telecommunications infrastructure initiatives within the Southern and East African subregions, as well as the interrelated regulatory, policy and funding issues and to plot the way forward with stakeholders. The report is broken into four parts: Part 1: Analysis. The first part of the report deals with key policy and regulatory impediments, restrictions and bottlenecks that need to be addressed in order to ensure open, fair and pro-competitive access to the proposed infrastructure in East African countries. It is broken into three sections. The first, Licensing of international facilities, provides an analysis of the structure of international telecommunications market in Africa, and the key market and technological trends shaping the development of this sector. The second, Barriers to Access, looks in depth at the specific barriers and bottlenecks to open and competitive access to regional infrastructure which is inherent in the ownership structure of regional infrastructure projects and current regulatory structures. The third section, Experience of Sat-3/WASC non-member access looks at the experiences of operators getting access to this infrastructure in Ghana, Nigeria, Senegal and South Africa. Part 2: Conclusion. The second part provides a conclusion to the issues discussed in Part 1, and provides a set of eight preliminary recommendations. Part 3: Country Case Studies. The third part of the report includes detailed case studies for seven countries: Ghana, Kenya, Nigeria, Senegal, South Africa, Tanzania and Uganda. These case studies examine the legal and regulatory framework in each country, and looks specifically at issues such as interconnection and dominant carrier regulation where these are applicable. Part 4: Annexes. The fourth part of the report includes annexes supporting the analysis and research of the preceding two parts. These include the chapter relating to landlocked countries within the United Nations Convention on the Law of the Sea (UNCLOS) Treaty. It also includes pertinent international gateway licences, for Nigerian operator NITEL and South African operator Sentech, and the 2001 Kenya Telecommunications Policy. 1

6 ICI Policy and Regulatory Study - Africa Background The lack of adequate regional Information and Communications Infrastructure (ICI) to support high-quality, high-speed Internet connections in Sub-Saharan Africa is currently recognized as a major obstacle for setting the region s economic and social development in motion. International Internet bandwidth is both limited and expensive for SSA. The region, as reported in a recent ITU publication, has the lowest capacity for international Internet bandwidth in the world. This lack of bandwidth in turn contributes to excluding SSA from taking active part in the information-based economy. 1 As highlighted in the Africa Region ICT Strategy and Roadmap, a recent internal World Bank report on SSA, a growing number of SSA countries, governments, regional organizations, notably NEPAD, SADC, COMESA and ECOWAS and private sector operators have identified building regional backbone infrastructure as a top priority for improving connectivity in the region. Several competing regional backbone infrastructure initiatives are currently under discussion for the SSA region notably the East Africa Submarine Cable System (EASSy), COMTEL, COM-7 and SADC s Regional Information Infrastructure (SRII), IFONI, etc The Cost of each project ranges from $60 million to over $300 million. The EASSy project is gaining increasing support among operators in the region. It was also recognized by the NEPAD Heads of State and Government Implementation Committee (HSGIC) in March 2003 as one of NEPAD s ICT priority projects. EASSy is a fiber optic cable project proposed to connect seven coastal countries in East Africa, including: Djibouti, Kenya, Madagascar, Mozambique, Somalia, South Africa and Tanzania (the EASSy anchor countries ). In addition, 15 other East African countries have expressed interest in connecting to EASSy through terrestrial means. 2 The estimated cost of ESSAy is US$300 million and an additional US$ 300 million for the connection of the 15 inland countries. Regional backbone initiatives promise to bridge the backbone gap in SSA. With EASSy, submarine cables will surround the African continent, for the first time. Both Sat-3/West African Submarine Cable (WASC) and the planned EASSy will be used for building additional terrestrial broadband networks that would connect the submarine cables to more 1 According to the latest ITU survey, the Africa region has the lowest amount of international internet bandwidth in the world with 1,236 megabits per second (Mbit/s) in 2001, less than one-eight of Oceania s 8,968 Mbit/s and a miniscule fraction of the 353,040 Mbit/s for the Americas. Conversely, a recent ITU survey found that the Africa region also has the highest broadband prices of $913 per month compared to $320 per month for Oceania and $88 for the Americas ITU. Birth of broadband. September Tables A-47 and A-51. The prices are for monthly residential subscription cost to broadband service based on the most common or cost -efficient broadband offer. See technical notes in Broadband for all for details (page A-56). 2 The 15 interested countries are: Botswana, Burundi, Comoros, Democratic Republic of Congo, Eritrea, Ethiopia, Lesotho, Malawi, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe 2

7 ICI Policy and Regulatory Study - Africa than a dozen land-locked SSA countries through specific landing points. The initiative would improve the connectivity of the region to the rest of the world for both voice and data communications. The EASSy will help Africa move towards self-sufficiency and decrease the continent s dependency on outside countries for telecommunications services. Instead of paying high charges for international connection through a transit point, operators in the region can establish direct connections, which promises a substantive decrease in their operating costs for international telecommunication. 3 This in turn promises important benefits to the ultimate African consumers and businesses through substantial price reductions for both voice and Internet services. In the longer run, the benefits of improved connectivity and improved competition will result in fostering the economic and social development of the region through increasing its competitiveness and its attractiveness to foreign investors. The WBG is in the initial stages of exploring the possibility of using one or more instruments to help finance regional ICI in general and the EASSy in particular. The WBG has participated in the most recent EASSy Steering Committee meetings, held in Botswana at the end of January IFC trust funds are being mobilized to carry out a commercial feasibility study, in cooperation with EASC/EASSy, which will focus on the commercial and financial viability of the project. 3 Unverified reports have indicated that that the SAT-3 cable in West Africa is saving its members US$300 million a year since they are no longer forced to route their traffic through the United States and Europe through satellites. 3

8 ICI Policy and Regulatory Study - Africa Executive Summary In order to secure maximum benefits from the new infrastructure initiatives, restrictions and bottlenecks on international access need to be addressed. Regulatory and policy conditions of participating countries need to be assessed, appraised and adjusted to ensure open, fair and procompetitive access to the proposed infrastructure. In this context, the New Partnership for African Development (NEPAD) secretariat and several governments have indicated that the Bank could play a pivotal role in regional backbone infrastructure initiatives by examining the policy, legal and regulatory barriers in the SSA region and by helping facilitate consensus -building activities between SSA governments and regional organizations on prioritizing and rationalizing the competing initiatives. This report focuses on regulatory and policy issues relating to open and competitive access to regional infrastructure projects, rather than on the feasibility of such projects. In order to meet the suppressed underlying demand and secure the highest level of voice and data traffic levels for the regional backbone infrastructure initiatives, restrictions and bottlenecks on international access need to be addressed. The purpose of this report is to high light those areas that need special attention in order to create an enabling environment for open and non-discriminatory access. Key findings Social and economic development. International voice and data traffic is closely correlated to flows of people and of money. Given the high correlation between the level of international trade and investment with international communications traffic, lower cost international traffic contributes to multiplier effects through the economy which are important for development. Conversely, low supply and higher costs have suppressed the level of international traffic, and in turn levels of trade and investment. Changing market dynamics. Under the monopoly on international traffic held by fixed-line incumbent operators and with supply constraints, incumbents have traditionally operated a high-margin, low -volume business. The emergence of grey market traffic on the one hand, and on the other the use of voice over Internet protocol (VoIP) by incumbents and introduction of greater levels of supply through submarine fibre is both forcing and facilitating a transition to a low-margin, high volume business model. Mounting pressure to liberalise international segment. The ability to offer international services is closed unless more than one gateway operator is licensed. As the legal monopoly on international traffic held by fixed-line incumbents draws to an end, governments in Ghana, Kenya, Senegal and Tanzania are due shortly to issue a definitive policy for this segment. At the 4

9 ICI Policy and Regulatory Study - Africa same time, mobile operators, ISPs and other operators are beginning to generate more international traffic than the fixedline business of the incumbent. These market dynamics not only put pressure on domestic interconnect agreements between operators, but have also brought greater pressure for mobile operators in particular to be licensed to operate international gateways in their own right. Systemic disincentive to liberalise international segment. Governments continue to hold a controlling stake in most PTOs, which have historically derived substantial hard currency inflows from high international termination rates and tariffs. These hard currency revenues may be disproportionately important to the operators and therefore to the income generates for their owners (governments) receive through dividends. This provides a systemic disincentive for the policy decision to liberalise the international segment. The ownership structure of EASSy and other regional backbone infrastructure projects is pivotal. A consortium is by its nature a closed system and restricts direct access exclusively to its members who are largely free to determine the prices charged. If the proposed EASSy cable is to be a consortium model, this has two implications: Operator lock-out. Unless operators which will become eligible for direct access are granted international licences before the C&MA is signed, or a mechanism is put in place for them to join the consortium at a later date, they will be locked out from the opportunity to participate directly in the cable system. In order that such operators will be licensed on the same terms as incumbents in a liberalised international segment, they must be given the option to become members. Less scope for regulatory oversight. Unless regulators plan or implement an instrument through which they can regulate international termination and interconnect charges (and regulate exclusivity of access to foreign systems) before the C&MA is signed, they will have as little control over these issues as they currently do over satellite circuits. Traffic levels need to be ascertained. Given that the levels of international voice traffic and Internet bandwidth have been suppressed by low supply levels and high prices under a monopoly environment, it is essential that operators can accurately ascertain their current and future capacity requirements (in some cases under a liberalised market) in order to decide the minimum number of IRUs (or capacity to be leased) which they would commit to purchasing on submarine cable systems. The true level of existing and future underlying demand for international traffic needs to be ascertained in order to dimension not just the EASSy cable and landing stations, but also the capacity of the backhaul network, switching and repeater 5

10 ICI Policy and Regulatory Study - Africa stations. Increasing number of eligible operators. Current signatories to the Memorandum of Understanding (MoU) for EASSy include the alternative operators MTN Uganda and Sentech in South Africa. Whatever the ownership structure of the proposed EASSy cable, by the time it would enter commercial service, at least six signatory countries to the MoU would have at least one other fixed-line carrier licensed to operate an international gateway. In addition there are already a number of mobile operators and data communication operators which are licensed to operate international gateways and would therefore be eligible for direct access. Rights of way for landlocked operators. Six landlocked operators have signed the EASSy MoU, and others are yet to fully participate 4. Eligible operators in the landlocked countries of Botswana, Burundi, Ethiopia, Lesotho, Malawi, Rwanda, Swaziland, Uganda, Zambia and Zimbabwe must physically transport their traffic through the territory of adjacent littoral ( gatekeeper ) countries in order to access the submarine cable landing points. Depending on the routing of backhaul links operators in Rwanda must pass through at least two, and in Burundi potentially three countries. This requires cross-border interconnection and backhaul to the landing point. Cost and terms of cross-border interconnect. Existing crossborder interconnect agreements are based on bilateral flows of traffic and in many cases on low traffic volumes through legacy analogue links; the need to access submarine cable landing points through intermediary countries would substantially alter both the volume and direction of traffic and require a revision of existing agreements to accommodate this. Cost and terms of backhaul across intermediary countries to submarine cable landing points. For all operators the case for regional terrestrial backbone infrastructure rests on the premise that transmission capacity will be less expensive than satellite. For landlocked operators the terms and costs of backhaul across intermediary countries must be added to the cost of IRUs (or other) on that system and other costs of onward upstream connectivity. This creates additional costs reinforcing the geographic disadvantage of landlocked states. With the entry into service of submarine cable systems, landlocked operators and gatekeeper carriers are inherently unequal partners in bilateral interconnect 4 Botswana Telecommunications Corporation (BTC), Ethiopia Telecommunciations Corporation (ETC), Malawi Telecommunications Ltd (MTL), MTN Uganda Ltd, Rwanda Telecommunications Ltd (Rwandatel), and Uganda Telecommunications Ltd (UTL) have signed the MoU; Lesotho Telecommunications Corporation (LTC) is actively participating in the project; operators in Zambia and Zimbabwe have yet to fully participate. 6

11 ICI Policy and Regulatory Study - Africa negotiations. This can exert additional pressures onto what may already be emerging agreements. Landlocked operators are in a naturally weaker position, as they have no alternative but to use the gatekeeper carrier in order to access the landing station and cable system in which they might have purchased IRUs. The landlocked countries will therefore be forced to use the cable in order to realize their investment in it, giving the gatekeeper operators power to leverage their position. To a large extent, as owners of the cable the landlocked operators would be able to management of the cable system in order to facilitate the flow of traffic onto the cable. Indeed, the opportunity exists out the outset to negotiate the terms and charges for the cross-border interconnect and backhaul as part of the landlocked operator s ownership of the submarine cable system. Without regu latory oversight of cross-border interconnects, gatekeeper operators can sell capacity to non -members at retail prices. If landlocked operators are locked out of the C&MA and do not become owners of the cable system, they must therefore purchase capacity from the gatekeeper operators. There is little or no scope to decide in advance the terms of whether or not bilateral interconnect plus backhaul are charged on a retail, wholesale or at-cost basis. Where the gatekeeper operator holds a monopoly, the risk is that the landlocked operator would be subjugated to the same terms and retail prices which prevail within these countries. It is for this reason that the Malian operator Sotelma has been unable to agree with Senegalese operator Sonatel to get access to Sat-3/WASC. 7

12 ICI Policy and Regulatory Study - Africa Part 1: Analysis Licensing of international facilities Eligible Operators The only operators which are eligible for direct access to international submarine cable systems are those which are licensed to own and operate an international gateway. This is exactly the same for satellite earth stations. The Construction and Maintenance Agreement (C& MA) for Sat-3/ West Africa Submarine Cable (WASC)/ South Africa - Far East (SAFE) was entered into at a time (in 1999) when all of the signatory African PTOs (except Ghana) held a monopoly on international services, the number of mobile lines was only a fraction of fixed-line and Internet services were just beginning to emerge. By the time Sat-3/WASC/SAFE entered commercial service three years later in 2002, the landscape had changed considerably: the number of mobile subscriptions had overtaken fixed lines, and a growing number of ISPs requiring international bandwidth. Mobile operators and ISPs were beginning to generate more international traffic than the fixed-line business of the incumbent. These market dynamics not only put pressure on interconnect agreements between operators, but has also brought greater pressure for mobile operators in particular to be licensed to operate international gateways in their own right 5. One potential policy bottleneck for regional backbone projects is that there will be more international gateway licence holders who would be eligible to become owners of the cable. The World Trade Organisation (WTO) deadline of 2005 to liberalise the international segment will have been reached before the time proposed EASSy would enter service. At least six signatory countries to the Memorandum of Understanding (MoU) - Kenya (2004), Madagascar (2006), South Africa (2004), Tanzania (2005), Uganda (1998), and Zimbabwe (2002) - would have at least one other fixed-line carrier licensed on the same terms as the incumbent. Furthermore, there are already a number of mobile operators, data communication operators and ISPs within the region which are already licensed to operate international gateways and would therefore be eligible either for ownership rights or for direct access. This number may increase depending on the policy to liberalisation of this segment in each individual country. Under these circumstances, exclusive access to submarine fibre by the incumbent could create an unequal playing field vis-à-vis both alternative fixed line operators as well as mobile operators. Mauritius provides a key example of the creation of an open and competitive international telephony market where the incumbent has exclusive rights to a submarine cable. While Mauritius Telecom is one of 5 For example, a spokesman for Celtel International said in June 2004 that Telecommunication links across networks in the Common Market for Eastern and Southern Africa (COMESA) region can only be attained if governments liberalise their telecommunications sectors If sectors are liberalised, it will be possible to link because you will not have to go through the international gateway of a monopoly. (source: New Vision, 14 June 2004). 8

13 ICI Policy and Regulatory Study - Africa the members of the Sat-3/WASC/SAFE consortium, the regulator brought forward the end of its monopoly on international services by one year to 31 December It has since issued a second fixed-line PSTN licence, six licences to new international long distance (ILD) operators (including one to the new PSTN operator), and also Africa s first international Internet Telephony Service Providers licence. The key point is that where the prospective ILD operators simultaneously applied for earth station licences in order to get their own upstream international links independently from Mauritius Telecom, the licences granted to them from December 2003 onwards stipulate that they must get their international transmission capacity from a licensed access provider, ie one of the two fixed-line (PSTN) or three mobile (PLMN) operators. The scope and term of the ILD licences stipulates that: This Licence authorises the Licensee to provide, on a nonexclusive basis, an ILD Service 6, which is a network carriage service, providing International connectivity to the network operated by foreign Carrier Providers. The Licensee shall be entitled to provide carriage services so that end-to-end tele-services including voice, data, fax, video, multi-media and international bandwidth, can be provided by the latter to its Subscribers through a licensed Access Provider 7. The Licensee may either set up the physical infrastructure itself or take infrastructure from network infrastructure providers (category A Licence holders) and take bandwidth from Networking Services Providers National (category B.01 Licence holders) for connecting its Point of Interconnection (POI) with other Access Providers. Liberalisation of International Segment The ability to offer international services is closed unless more than one gateway operator is licensed. As the legal monopoly on international traffic held by fixed-line incumbents draws to an end in a growing number of countries, governments in Ghana, Kenya, Senegal and Tanzania in particular are due shortly to issue a definitive policy for this segment. Carlo Maria Rossotto et al 8 argue that developing countries that restrict entry to the international communications market face three consequences: 1) higher prices; 2) lower outgoing volume; and 3) reduced network investments monopoly market structure results in a protection of the interests of the incumbent operator, constrains volumes, 6 ILD Service means a network carriage Service providing International connectivity and Services, including: (i) calls originating from Mauritius to another country; (ii) calls terminating in Mauritius from another country; (iii) transit of calls from one country to another through Mauritius; and (iv) provision of international bandwidth. 7 Access Provider means a licensed local PSTN and/or PLMN Service provider which has direct access with the Subscribers 8 Competition in International Voice Communications: The Cost of Non-Reform for Developing Countries Carlo Maria Rossotto with Anat Lewin, Carlos Gomez and Björn Wellenius. 9

14 ICI Policy and Regulatory Study - Africa adversely affects network development, imposes high charges on domestic consumers and enterprises, and stifles economic competitiveness By moving towards a fully-competitive marketplace, developing countries can encourage lower service prices, increased network usage, and greater investment in network infrastructure and services. Table 1: Liberalisation of International Segment Red = Monopoly, Orange = Liberalised, Dark Green = Competition, Light Green = More than one competitor. WTO guidelines deadline of Country Burkina Faso Botswana Cameroon Cape Verde CAR Chad Congo Cote d Ivoire Equatorial Guinea Gabon Ghana Guinea Bissau Kenya Mali Mauritania Mauritius Niger Nigeria Sao Tome & Principe Senegal Sierra Leone South Africa Tanzania (see also Zanzibar) Uganda 10

15 ICI Policy and Regulatory Study - Africa Zambia Zanzibar Zimbabwe Source: Paul Hamilton, Balancing Act West Africa Internet Country Profiles (unpublished), DFID International Transmission Capacity Forecasts (unpublished), other. Settlements for International Traffic International termination generates significant hard currency revenues for many developing countries. The asymmetry in traffic flows from developed to developing countries, which developed after the liberalisation of international segment in developed countries in the late 1990s has created settlem ents highly favourable to African recipients. The table below shows that in 2002, US operators alone paid US$223.9m to African operators for terminating calls onto African networks, and received US$14.6m in return for terminating calls from Africa onto US networks and US$20.4m for transit to third countries. Under protest from US carriers and with changes to the international settlement regime this position has changed, eroding these revenues. In 1998 US carriers paid US$413.8m to African operators, whilst African operators paid US$67.3m to US carriers to terminate on their networks and US$260.5m for transit traffic to third countries. The revenue earned from terminating calls from the US has nearly halved over this period 9. Table 2: Settlements for International Traffic between Selected African Countries and US Carriers, 2002 Country Traffic Billed in US Million Minutes Pay out to Foreign Carrier (US$ 000) Traffic Billed in Foreign Countries Million Receipts Minutes from Foreign Carrier (US$ 000) Traffic Billed in Foreign Countries Transiting the US Receipts from Foreign Carrier (US$ 000) Pay out to Foreign Carrier (US$ 000) Benin Burundi Botswana Cameroon , Cote d Ivoire , Djibouti Ethiopia , , Gabon Ghana , , Kenya , Lesotho Madagascar Malawi , Mozambique Namibia Nigeria , , , Rwanda Senegal , Somalia , South Africa , , , Sudan , Swaziland Note, this situation is reversed for Internet through payments from African ISPs to Internet Backbone Providers (IBPs) which make payments off-continent estimated to be in the region of US$500m per year. 11

16 ICI Policy and Regulatory Study - Africa Tanzania , Uganda , Zambia Zimbabwe Africa Total 1, , , , ,498.0 Source: FCC, 2002 International Traffic Data (March 2004) One barrier to liberalising the international segment is that most African governments continue to hold a controlling stake in PTOs. In cases where the PTO has not been restructured or privatised many still derive a high percentage of their total revenue from international calls. For example, Ethiopia Telecom Corporation (ETC) received US$9.5m from US carriers in 2002, equivalent to 8.3% of total revenues. It is extremely hard to unpack the level of revenue each government takes out of its fixed-line operator as there is little or no transparency as to the exact levels of dividends which are paid to government. It is only when the incumbent is privatised and/or publicly listed that it becomes possible to see rather more clearly where its revenues come from and how it allocates its resources. Published sources indicate that total international revenues vary as a proportion of overall revenues from 3% (South Africa) to 89% in the case of Guinea Bissau. In June 2003, the Chairman of the Mauritian regulator added 'There is a lot of cash coming from international services If you look at the figures for Mauritius Telecom, 20% of its profit comes from the local basic service, whereas 80%...stems from its international services. T hese hard currency revenues may therefore be disproportionately important to the operators (and therefor e) governments that receive them. One more extreme case of attempting to maximise hard currency income for the government from terminating international traffic is in Zimbabwe, where the government is attempting to implement a national one gateway polic y to reduce the number of international gateway operators from eight to one. In addition to the wholly state-owned fixed-line operator Tel*One, three mobile operators and four others are licensed to operate international gateways. In December 2003 the Government of Zimbabwe announced that it wanted to look at how it could optimize foreign currency receipts and payments arising from international gateway licenses currently held by the cellular phone operators, said mobile operator Econet Wireless Zimbabwe in June Source: Strive Masiyawa, Econet Wireless Zimbabwe Investor Update, 3 June Given that the right to operate an international gateway is enshrined in our license, Econet Wireless (in addition to the other Zimbabwean mobile operators) advised the Regulator that there were legal, commercial and technical problems associated with making any amendments to existing Licenses which would result in the withdrawal of the operators rights to operate its own independent gateway. In addition, the industry is currently working with the Zimbabwean Government to work out the best way of implementing a 'national one gateway policy'. The authorities have asked the operators who currently have independent gateways - there are a total of eight in Zimbabwe - to enter into discussions and consultations on how this matter can be progressed without prejudicing the financial and operational positions of the operators. Econet Wireless is a member of the special committee set up by the Zimbabwe regulator to see how this can be implemented. 12

17 ICI Policy and Regulatory Study - Africa On 29 January 2004, the government published Telecommunications Service Regulations in the Government Gazette stating that Tel*One shall with effect from 31 January provide access to all international telecommunications services and provide international interconnection capacity to all other public licensed telecommunications including internet companies any operator providing direct international telecommunication services must cease operations within the next 30 days and make appropriate measures to comply with the new regulations. 11 The mobile operators look legal action to prevent the government from rescinding their international gateway licences. Incumbent monopoly PTOs also typically also have tariff structures which are based not on costs but on cross-subsidies from high-value services (such as international calls) to low-value ones (such as local access). Incumbents therefore tend to justify high international tariffs and termination charges charged in monopoly environment on the basis that this revenue pays for the roll-out of transmission network and local access infrastructure. This has now been given additional emphasis as the operators pursue Universal Access strategies. The incumbents in most of the study countries have fallen behind roll out targets. A number of PTOs have begun rebalancing tariffs across the local, long-distance and international segments, but this has usually only occurred after privatisation has occurred. From a policy perspective, this provides a systemic disincentive to liberalise the international segment. In the case of Sat-3/WASC for example, the African PTOs which are members of the consortium were either wholly state-owned, or majority state-owned, at the time when they invested in the cable system and are therefore under pressure to maintain the monopoly on international traffic and exclusivity on access to the cable in order to recover the investment made. Voice over Internet Protocol At the same time that government policy may for the reasons out lined above be reluctant to remove monopoly on international gateways, a key shift has occurred in the wholesale international voice market for IP Telephony and Voice over Internet Protocol (VoIP) because of the withdrawal of traditional carriers. While the volume of international traffic continues to grow, those European and North American carriers which have traditionally carried Africa s international traffic tended to refocus on their core markets and have shrunk away from Africa. Into this widening gap have stepped a number of global wholesale carriers, including those using Internet telephony such as Gateway Communications, ITXC, and ibasis. IP telephony has fundamentally changed the economics of international voice communications, and because it is based on IP falls outside the settlement regime based on the circuit -switched network. (For this reason is not clear what volumes of traffic or level of revenue is derived from VoIP). Where African incumbent PTOs were initially slow to respond to this opportunity, the informal sector was not. Seeing the opportunity to bypass the extremely high prices charged for international calls, a 11 Source: Afrol News 13

18 ICI Policy and Regulatory Study - Africa number of small, informal and illegal operators began exploiting this opportunity and undercut the incumbents. The grey market is now estimated at between 10 20% in most African countries, but as high as 90% in the case of Nigeria. Essentially, the large size of the grey market exists because of the transition between two business models 12 : one clung to by monopoly incumbents based on low -volume, high-margin; and another employed by alternative VoIP providers based on high-volume, low-margin. The commercial proposition of VoIP lies in the ability to offer cheaper calls and create an arbitrage opportunity, allowing operators to buy minutes from outside Africa and sell (terminate) them more cheaply in the region undercutting monopoly incumbents and taking traffic away from them. This shift to a high-volume, low-margin model will eventually require greater transmission capacity. In order to maximise the throughput on satellite circuits, operators use DCME compression. The extent of this extra requirement will depend on the point at which the volume of traffic using VoIP (which uses a compression ratio equivalent to 8:1) overtakes the level of compression currently used by the incumbent for its circuits (2:1, 4:1). Realising that new alternative operators were nibbling ever greater into their traffic, incumbents and regulators have adopted a number of strategies. The first has been to reassert the legal monopoly on international voice traffic, and attempted to close down perpetrators. This has sometimes been done in collaboration with the regulator, and sometimes unilaterally, but where one has been closed down others have opened elsewhere. A second strategy has been that the incumbents have been forced to reduce the margin on international telephony by lowering their tariffs in order to remain competitive. Third, a growing number of incumbents have begun to use VoIP themselves. This allows them to recapture traffic lost to the grey market. It also allows them to reduce the transmission and switching costs over expensive satellite circuits, and also to lower interconnect costs by originating (sending) VoIP minutes to reduce out-payments whilst terminating (receiving) circuit-switched minutes to earn the termination charge. Fourth, incumbents have adopted an if-you-can t beat-them, join-them strategy in which incumbents have struck deals with cyber cafes or ISPs to terminate voice traffic. The Senegalese PTO Sonatel attempted to do this, and Kenyan PTO Telkom opened negotiations with ISPs with a view to allowing them to terminate VoIP calls. And fifthly, some regulators (in Nigeria and Mauritius) have specifically permitted alternative op erators to originate international VoIP calls, but not to terminate them. The scope and terms of the Internet Telephony Service Providers licence issued to Paging Services Ltd on 19 December 2003 stipulates that: This licence authorizes the Licensee to provide, on a nonexclusive basis, an Internet Telephony service, to the public. The Licensee shall use the public Internet as the medium for carrying voice conversation using (i) computers, (ii) a computer to a telephone abroad and (iii) a telephone in Mauritius to a telephone abroad. 12 Russell Southwood, CEO Balancing Act West Africa An Overview of Data and Significant Trends from African Internet Country Profiles (unpublished). 14

19 ICI Policy and Regulatory Study - Africa The Licensee shall offer the Internet Telephony Service to a telephone abroad solely in the following manner: (a) the Subscriber shall get access to the ITSP through the Access Provider, by dialing a local PSTN number, assigned to the ITSP by the Authority in accordance with the National Numbering Plan The dial-up connection provided by the PSTN operator to the ITSP shall be restricted to dial inwards facility only (that is, no dial outwards from ITSP allowed). The Licensee shall not: (a) (b) terminate any call on the PSTN/PLMN telephone in Mauritius; or establish any media gateway between the Internet and a PSTN/PLMN of Mauritius establish an international gateway. The ITSP shall take international bandwidth for connectivity to the Internet from either a licensed ILD operator or a networking services (international) provider Table 3: Sonatel Successive VoIP Strategies. In the absence of a clearly defined regulatory environment, the use of Voice over Internet protocol (VoIP) has proved a thorny issue in Senegal. Since 2000, a number of Internet service providers (ISPs) have been openly marketing VoIP services that undercut Sonatel s off-peak international call tariffs by up to 50%. Most of the 7,000 or so telecentre and value added service (VAS) providers are equipped with computers and are offering public Internet access. Some of them began using PC-tophone Internet telephony. This has irritated Sonatel, which has tolerated the emergence of Internet telephony and responded by consistently reducing its international call rates in order to keep ahead of the competition. The termination of international calls routed on IP networks onto its PSTN has posed a serious threat to Sonatel as the payment for terminating international calls constitutes an important source of revenues for the operator. Even though Sonatel warned several times of the illegality of offering these services, it has not yet taken any legal action against the ISPs offering it. In April 2000, Sonatel took cons ervative measures against one ISP that was terminating calls on the PSTN via the Internet. Millenium Telecom Group has seen its activities ceased and has filed a lawsuit for against Sonatel for obstructing its business and requested compensation of 500 Millions CFA, but the ISP was turned down by the Court. Having initially based its response to VoIP on a coercive policy of exerting its control of the local loop which delivers bandwidth to the ISPs, Sonatel then shifted strategy. It attempted first to try to control the termination of calls by allowing third parties to operate in this sector in return of the fees payment on generated traffic. The Collectif des 15

20 ICI Policy and Regulatory Study - Africa Opérateurs Privés de Terminaison d'appels (COPTA) was established to confer this right to terminate VoIP calls onto the PSTN, and included about ten private operators which were authorized to do so. Secondly, in October 2001, Sonatel then decided to begin offering VoIP services itself and signed an agreement with international wholesale carrier ITXC to terminate VoIP calls, and planned to begin originating calls. In May 2003, Sonatel then also signed an interconnect agreement with the wholesale carrier Gateway Communications to terminate international telephone calls in Senegal and offer low cost international calling services. These interconnects helped Sonatel to recapture traffic lost to the grey market, and also for it to target non-traditional sources of traffic such as the international calling-card market, and to lower the cost of outbound calls to key international destinations such as European mobile networks 13. According to some reports, Sonatel uses up to 26 Mbps of its international Internet bandwidth to carry voice traffic as VoIP. (The interconnect with Gateway Communications uses satellite capacity, according to a company press release). In 2002, members of COPTA then complained that Sonatel was setting tariffs which discriminated against them in favour of its own VoIP traffic 14. A number of these operators have since been forced to close down as Sonatel has offered better termination rates with the international wholesale carriers than these local operators. The only providers which have survived, such as N2P partners and DSG, have been those which are originating traffic independently from Sonatel. Barriers to access Ownership structure of EASSy and other regional backbone infrastructure projects The ownership structure of regional backbone projects is pivotal to whether or not they allow open and competitive or closed and monopolistic access. There are four types: consortium (like Sat-3/WASC and SAFE), a private model (like FLAG), a co-build or a hybrid. Table 4: Ownership Structure of Submarine Cable Systems Type Description Examples Advantages Disadvantages Consortium Built by consortium operating through a management committee. Sat-3/WASC SAFE TAT-14 Owners get capacity at cost; financial stability Conflict between large and small owners; owners pay fixed O&M charges regardless of actual capacity Private Built by start-ups as a speculative venture, usually FLAG Tyco Transatlantic, Rapid deployment; simpler usage Responsibility for entire construction 13 Source: Gateway Communications 14 See for example Vincent Joguet, Télécommunications : La Sonatel dans le collimateur des opérateurs de terminaison d appels 16

21 ICI Policy and Regulatory Study - Africa Co-build Hybrid operating as carriers carriers. In some cases entrepreneurs own the cables; in others, they only manage them. Capacity is owned outright or on IRU basis by third parties. Built by two or more carriers carriers; owners manage and market capacity individually Built by one or more carriers but operated and managed by a separate private company Hibernia Atlantic Tellow/ AC-2, FLAG/REACH North Asia Loop C2C Cable Network, Australia-Japan Cable Source: International Bandwidth, TeleGeography. management Financial risk is spread; owners get capacity at cost Financial risk is spread; simpler management than traditional consortia and maintenance costs Owners compete against each other; May introduce too much capacity into the market Owners do not receive capacity at cost A consortium restricts direct access exclusively to its members, who control supply and are therefore able to set their own prices. In the other models the operating company which owns the cable can sell capacity to any eligible operator and prices are in theory likely to be more market oriented. If the EASSy is to be a consortium model, this has two implications: Operator lock-out. Unless operators which will become eligible for direct access are granted international licences before the C&MA is signed, or a mechanism is put in place for them to join the consortium at a later date, they will be locked out from the opportunity to participate directly in the cable system. Little scope for regulatory oversight. Unless regulators implement an instrument through which they can regulate international termination and interconnect charges before the C&MA is signed, they will have as little control over these issues as they currently do over the pricing of international satellite circuits. At least two countries with access to Sat-3/WASC have a legal prohibition on exclusive dealing in international services (Nigeria and South Africa), so operators cannot refuse to supply qualifying operators. The regulators also have control over the pricing of that access, under their mandate to regulate interconnection. Cross-border interconnection There are surprisingly few functional terrestrial international links between African countries. The terrestrial microwave and fibre networks of many African operators are inadequately interconnected and of those international links which do exist, many are still analogue and do not have sufficient capacity. Many of the international links built during the 1970s and 1980s under the Panaftel programme have fallen into disrepair or have been damaged or destroyed during conflicts. Even the world s 17