The factors of telecommunications deregulation (or whether deregulation is indeed valuable at all as a policy tool) are vastly complicated by the present industry situation in Africa. In this paper we attempt to break down that situation into key issues and then suggest a “Way Forward” for African countries that want a vital telecommunications sector.
Industry Situation
Telecommunications networks require capital investment, customers who can support that investment, and a clear regulatory environment that is not disruptive or counterproductive. In Africa, all three inputs have been in short supply.
One of the historical motivations for the invention of the monopoly PTT was the thesis that the capital investment required to build a national telecommunications network was so large the market would only support one supplier. Indeed, for many countries the market was not large enough to support any supplier. As telecommunications is typically (and correctly) viewed as an “essential utility” necessary to the functioning of a modern society, it “made sense” for governments to step in and create at least one telecommunications company where the free market would have created zero.
But, that was yesterday. In today’s world the cost of building various types of telecommunications networks has fallen drastically. Some network forms are so inexpensive that even “micro credit” can supply sufficient capital investment to create network elements in the poorest village. Still, even today, some network elements, such as undersea fiber optic cables, require investments in the hundreds of millions of dollars, which for Africa is still a major hurdle.
Africa has developed enough of a “middle class” that the markets for telecommunications services have grown dramatically. This development affects what can be privately financed, and in the mobile sector we see this demonstrated. Over the past 10 years Africa has seen significant private capital invested in the mobile telephony sector and through various tiers of distribution the sector has been able to serve customers too poor to purchase their own telephone (but rich enough to purchase pre-paid airtime cards). The same holds true for the “Internet Café” industry which is based on very small informally financed enterprises who serve customers who cannot afford to own a personal computer or Internet connection at home. There have been several attempts to bring large scale capital to the Internet Café industry in Africa and these have, for the most part, failed. A likely reason is that the required capital investment and expertise is already available across Africa, and large scale “outside” investors cannot add enough value to the industry to make a useful difference.
So, a complication of the African situation is that the lowering cost of technology, and some degree of economic health, have made development of privately financed telecommunications activity in Africa a viable business; at the same time there are certain classes of telecommunications networks which, for Africa, are still beyond the reach of the private capital markets.
Two Tiers
This has resulted in a “technology imbalance” in African telecommunication networks. There has been relatively too much investment in network elements such as mobile telephones and too little investment in regional and international fiber networks. It is important to understand that telecommunications networks are complex, hierarchal systems. It does not do much good for the mobile industry to sell ten million GSM phones if they don’t also have 100-200 million bits of international fiber capacity to support those phones. With the Internet the demands are even greater. Ten million DSL or wireless Internet customers could require 500-1000 gigabits of international fiber capacity to give Africans the same access to information enjoyed by Americans; and America now ranks 16th in the world and is dropping rapidly; Africa may need to aim higher than America if it wants to keep up with India and China.
Africa lacks networking elements that would create efficiency and lower the need for international bandwidth. For example, regional fiber networks and traffic exchange points and “telecom hotels” where telecommunications companies rent space for equipment, enjoy reliable power and air conditioning for sensitive electronic equipment, and have access to peer networks for interconnection. The actual structure of the modern global telecommunications industry is many tiers of networking elements backed by numerous, complex, privately negotiated, market driven business relationships. This structure has lowered the cost of telecommunications to its lowest point in human history and has made information a “natural resource” almost as essential to modern life as air and water.
Introducing Change
Telecommunications companies in Africa today are invariably vertically integrated companies; a situation which creates economic inefficiencies in several forms. For Africa to develop two or more tiers of market structure in its telecommunications industry, reform will be needed.
The regulatory liberalization and pent-up demand that allowed private capital to bring the mobile sector to where it is today will not be sufficient to create other network layers that are needed. This is especially true with the historical PTT companies as active forces in the marketplace. In most, if not all, African countries the PTT provides almost all layers of networking services other than mobile telephony. Many private telecommunications operators (PTOs) in Africa are dependent upon the PTT for long-distance circuits (regionally and internationally) and PTOs typically exchange traffic amongst themselves by transiting through the PTT. This inefficiency is, in part, due to a lack of management maturity within the PTOs (they prefer to compete with each other rather than form their own “cartel” to compete with the PTT) and partly due to a lack of private exchange facilities that would create an alternative to using the PTT as an exchange point.
One of the most troubling aspects of creating change is the privatization of the PTT. Most efforts at privatization to date have resulted in limited sales of stakes in the PTT to “outside” investors. Such sales, however limited, create two classes of shareholders (or more in some cases) with shareholders who have invested new money into the enterprise having some explicit or implied rights that have to be taken into consideration. Unfortunately, these shareholders are invariably seeking a significant financial return on their investment and thus they indirectly place great limitations on the business strategies of the PTT and of the other investors (the citizens) who might have other goals for utilization of the PTT as an asset.
Let us now review the important roles of the PTT and how they have changed in the face of new actors in the marketplace. It will be easy to see how ownership of the PTT and the motivations of the owners become a key factor at this time.
Prior to 1990 the African PTT provided essential services; making investments no other investor would make and serving customers no other investor wanted to serve. State ownership of the PTT was the only option and the PTT was operated not to make a profit, but to serve basic needs. In cases where the PTT was “profitable” the profits flowed to the national treasury (or to other beneficiaries in the case of corruption) but generation of profit was not the goal of any investor-class; the PTT was owned by the citizens and existed to serve the national interest.
Starting in the 1990’s new, lower cost technologies made the construction of new forms of telecommunications network affordable to a new class of investors. This coupled with the fact that, through years of mismanagement, most PTTs were, by this time, delivering poor quality and overpriced services, created an opportunity for profitable ventures. African governments responded in ways that were quite reasonable at the time, but in retrospect have created serious problems for the PTT. Understandably, African governments were unwilling to say “no” to private investors willing to build networks and satisfy customers who were unhappy with the PTT; most governments responded with enough regulatory liberalization to allow new networks to be built. As long as investors were able to tap into high levels of pent-up demand, and sell services to the most elite customers, they could ignore the fact that the limited deregulation created a highly distorted market that disadvantaged them in many ways. For example, the PTT sometimes retained the rights to operate “international gateways” or retained control of extremely rare fiber optic assets. Regulators may have ordered the PTT to provide interconnection to PTOs, but when the PTT failed to deliver, the judicial system rarely provided any useful compensation to the PTO-plaintiff.
Efforts at deregulation also created new telecommunications companies that were structurally crippled. Often licenses were granted for specific classes of technology (GSM, CDMA, fixed wireless) or specific services (voice telephone calls, internet services, “private” data). These distinctions are, in today’s world, technologically meaningless, but they allowed regulators to sell more licenses and create the impression that each licensee would enjoy a quasi-monopoly over something, or at least face a limited set of competitors rather than a completely free market. Unfortunately, it is impossible to run a telecommunications network using only one technology. This resulted in absurd inefficiencies which have a very negative economic cost. For example, a company licensed for mobile telephones might build a network of towers, but the mobile license alone would be insufficient to build a private “backhaul” data network to connect the towers to a headquarters. Perhaps a second license was sold, or an “exemption” was made, that allowed the mobile licensee to build a private data network for its own use. Having constructed dozens or hundreds of towers for the mobile network, the backhaul network would likely be constructed using terrestrial microwave technology, but fiber optics could be used as well. In either case the network operator might then be unable to use those network assets to sell private data network services because their “license” stipulates they are to be selling mobile phone service; the license to sell private data networks may have been sold to someone else.
Most African mobile network operators are vertically integrated. They operate mobile infrastructure, they operate backhaul networks for their own use, and they typically operate their own satellite earth stations. Because of the cost and difficulty of constructing regional networks, satellite technology is often used to relay signals just a few 100’s of miles and of course they are frequently used to relay signals outside national borders. Most network operators have to generate their own electricity and, having invested so much in their vertically integrated networks, most network operators have to supply their own security forces to protect expensive equipment. Thus the successful African network operator represents a fully vertically integrated company that constructs and operates multiple types of networks (at great employee training cost) using sometimes dissimilar technologies. The amount of redundant investment going on in Africa can be appreciated by viewing the skyline of any large African city; it will be dominated by hundreds of satellite earth stations and radio towers supporting all kinds of telecommunications. A single office building might have 2-4 towers on site, owned by different owners, each likely supporting a single antenna. The idea of sharing the cost of a single tower is virtually unheard of. Even sharing a power generator is unheard of. In the United States the major cellular companies no longer own any towers for cell site antennas and equipment; they rent them from “tower management companies” that specialize in the specific issues of that business (site acquisition, providing reliable electricity to remote sites, providing security).
The PTT
Over the past decade there has been very little attention paid to the PTT as a potential contributor to improved telecommunications; generally it is viewed as a “problem” low-performance organization. Most African governments would like to “privatize” the PTT to get responsibility for under-financed pension plans and blame for poor performance off the hands of government. They dream of a large outside company pumping millions of dollars into the PTT, making it once again a worthy business, and creating a windfall for the government selling shares. None of these events are likely to happen.
The era of private investment in telecoms in Africa may be slowing, as the mobile opportunity is now firmly in the hands of a short list of large competitors; to the degree that there are new opportunities in mobile and perhaps “wireless internet” the idea of sinking large sums into a PTT is not likely to be attractive to anyone; except a few “leveraged buyout” proposals from national-scale investor groups who hold illiquid currency and non-financial strategic capital (such as cultural expertise and political access) and who see opportunities to profit from partial or total dismantling of the PTT. But most plans, those sponsored by government privatization administrations and those from other quarters, all position the PTT in the standard competitive landscape of vertically integrated telecommunications companies.
Any existing private investors in the PTT are likely to have invested in the same vision of the telecom market: a set of vertically integrated communications companies. The PTT typically holds some economy of scale, superior licenses and in certain countries (such as those connected to the SAT3 submarine cable) the PTT may hold highly privileged positions in key monopoly assets. Private investors in PTT privatizations are typically betting on the thesis that a privatized PTT has some competitive advantage, will be “free to compete” when set free by privatization, and may, in the privatization process, shed some inefficiencies (bloated payrolls) and liabilities which will “create value” much as the bankruptcy process in developed economies can transfer wealth to new investors through debt cancellation.
Market Structure
However, before embarking on such a traditional vision of privatization, PTT owners (governments and the citizens they represent) should carefully consider the key structural issues affecting the marketplace. Any change to the status quo, even selling the PTT to outside investors, is an investment in creating change of some type, and an investment in a specific vision of the market. For citizens who hope for better telecommunications the stakes are particularly high because disposition of the PTT and deregulation are likely the only two chances they will have to obtain telecommunications services that are good enough and cheap enough to really change their lives. The telecommunications services Africans have today are grossly uncompetitive with most of the world; including other developing economies such as India and China. If bold strategic action is not taken soon, Africa could operate at an educational and competitive disadvantage for another century.
The vision of the telecommunications marketplace as a simple landscape of “competitors” each operating vertically integrated companies that build and operate telecom networks on behalf of customers is not a reflection of technical reality or the business structure of telecom globally. This is why turning the PTT into a privatized “peer” of other PTOs will not create the kind of structural change needed in Africa.
Telecommunications networks are built in layers of technical, managerial and regulatory specialization. Any service an end-customer buys is a complex composite of many network layers acting in harmony. The age of single giant companies like AT&T, British Telecom and France Telecom operating entire global networks and delivering all services to end-customers died many years ago. New technology and new customer demands have created great complexity in the global Internet; complexity that no company acting alone can master. This is true even for networks in small countries; it is true even of networks within large companies. No managerial organization operates an entire telecommunications network of any meaningful size by itself; outsourcing is ubiquitous in telecommunications.
The layers can be seen in technologies. There are companies that specialize in the operation of long distance fiber networks, companies that operate satellite networks, and companies that operate terrestrial wireless networks. Few if any companies attempt to do all three.
The layers can be seen in how the networks are used (and the technologies involved). Companies that operate satellite networks typically have entirely different skills sets than companies that operate networks of wireless “hot spots” providing public internet access. The differences between such companies are great, even though they all are involved in “wireless networking.”
There are distinctions between the types of customers a network serves. For example, many network layers operate and sell in “wholesale” markets; they sell only to large customers such as other telecom companies. Other companies specialize in selling to large numbers of “retail customers”. Cellular telephone companies and Internet Services companies generally serve small end-user customers; operators of submarine international cables invariably serve only other telecommunications companies. Sometimes these distinctions correlate with technologies (most fiber optic carriers sell wholesale) and sometimes they don’t (there are satellite companies that sell services to individuals, such as Ku band television services, and there are those that sell to other carriers and large end users, such as C band services).
The presence of specialized companies in telecommunications creates economies for other companies, in a virtuous circle, and, the absence of these specialized companies has a negative impact on the market. For example, operators of wholesale networks enjoy great economies of scale through traffic aggregation (combining the telecommunications data flows from multiple customers onto one physical circuit). Expensive resources like satellite circuits and international fiber networks can realize drastically lower costs-per-bit, per customer, when they are shared by many customers. Some technologies have very low marginal costs of scaling up bandwidth so, unlike the case in many industries, a single telecommunications network operator can deliver service to ten customers at virtually the same cost as delivery of service to one customer.
There are economies in other physical resources apart from bandwidth. For example, in all developed economies it is unnecessary for a company providing wireless telephone service to build and operate long-distance networks that connect radio towers, it is unnecessary to build networks that deliver phone calls to other phone networks, it is even unnecessary to build towers for antennas and radio equipment. Many African network operators benefit from the availability of some of these services in developed markets; they rent access to equipment and networks in markets such as London and New York where they can have access to services and networks that are unavailable in Africa. But within Africa they are unable to obtain any services from other network operators and service providers because there are so few specialist firms offering such services. Rather, there is a flat landscape of vertically integrated companies that are viewed only as competitors, not as potential suppliers.
This failure in the market structure of African telecommunications has a significant impact. It raises the amount of capital required to launch any telecommunications company and this serves to eliminate a certain amount of competition that might otherwise develop. Most investment dollars are naturally focused on providing service to easy-to-reach customers in large cities and, not surprisingly, rural telecommunications is underdeveloped. The cost to construct networks in rural areas can be the same or less than the cost to construct them in urban areas but the cost to connect rural networks to a national “backbone” network is typically prohibitive. Use of satellite circuits is common but those too are very expensive when high quality, high capacity technology is used. The lack of intermediary companies that operate large networks of satellite ground stations for multiple customers means each application must carry the entire cost of an earth station and satellite circuit itself. This drives out useful services that are not valuable enough to justify such costs, and it raises the costs of every unit of data transmission.
The principle goal of African telecom regulatory reform and any privatization initiatives should be to change the structure of telecommunications markets in Africa to something that is more efficient, and more attractive to capital investment. The authors would further suggest that the markets need to accommodate African management and capital groups operating on a smaller scale than international scale multinational investors. Too many telecom investments in Africa are driven by large vendor initiatives that have sold expensive systems that justify a large importation of technical and managerial talent from outside Africa. There is a mismatch of scale in these initiatives with what African economies can afford and usefully absorb. The technology lifecycle of much telecommunications technology is almost as short today as it is for computer technology and software in general; there is no reason to make investments that are over scaled for today but will make sense in 10 years. In 10 years the right technology will be 10 times cheaper; making smaller investments, suitable for smaller goals and time horizons, enables smaller scale African capital and expertise resources to compete for business opportunities.
To that end, breaking down the monolithic vertically integrated model of telecommunications is the most important breakthrough Africa can make and the PTTs can play a pivotal role towards that goal.
A New Mission for PTT Privatization
In its present form the PTT is an obstacle to progress for a number of reasons. It is the model of a vertically integrated telecommunications company; and a competitor to all other PTOs that are in the market or investor initiatives that might bring new competitors into the market. As a parastatal enterprise it enjoys licensing and other structural benefits that distort the free market; various efforts to create some balancing “incentives” for other investors in the market through “favorable” licensing deals or tax treatment simply serve to further move the market away from a free and competitive model to one in which the regulator is an essential actor. Privatization of the PTT and creation of a perfect “level playing field” might be a noble goal but for many African PTTs it is probably an unattainable goal. And privatization alone does nothing to change the market away from a model of vertical integration, which, as has been discussed, creates obstacles to entrepreneurial investments.
To understand what the highest and best use of the PTT might be, it is useful to consider the goals that created the PTT in the first place, and were used to justify various subsidies which have been invested into the PTT. Simply put, the purpose of public ownership of the PTT is not, and never has been, to own a profitable telecommunications company. The role of the PTT has been to provide telecommunications services that the free market did not and would not provide. Changes in recent years have enabled the creation of PTOs, while the role of the PTT has become ambiguous. It is also the case that historically, for much of the 1960’s-1980’s, the PTT was a “profit center” for government; especially with regards to its ability to bring in “hard currency” revenue. However, the global free market in telecom has erased that opportunity over the last decade; it is fair to say that today the goal of the PTT can be expressed very simply: to improve the quality of telecommunications. Period.
A privatization strategy that launches the PTT into a free market of vertically integrated telecommunications companies is not going to change the market structure and do much to advance the quality of telecommunications. If the PTT is operated as an investor-owned company with the same fiduciary obligations to shareholders that any other PTO has, then its business strategy will have to be substantially the same as all other PTOs in the market. That will mean pursuing the easiest profits first, and serving the richest customers, with almost no attention paid to the poorest. It will mean not investing in infrastructure that does not generate short term paybacks and it offers no room to make investments that would increase the diversity of services available. If money can be made, at low risk, by building GSM networks, then that is what all telecommunications companies will do, the privatized PTT included.
The authors suggest that a different strategy be considered. Most importantly, we propose that the PTT be operated not to maximize profit to investors, but to maximize the quality and diversity of telecommunications services in the market. If the PTT pursues strategies that bring new services and infrastructure to the market it will enable the growth of specialized companies that can build on these services, increasing the diversity of services in the market, and generate the hierarchal layering seen in developed markets.
This view of the PTT is not inconsistent with deregulation. There is no reason for the PTT to enjoy any special privileges in the market (nor is there any reason to assign special privileges to any other PTO). This view is not a form of “socialism” because we are not suggesting that the PTT control the market or any sub-market. Nor do we suggest that the PTT have any “natural monopoly” rights; that, for example, it be the sole operator of international gateways.
The most succinct statement of this new role for the PTT is to be the “first enabler”; to be first to provide access to infrastructure and services that are not being provided for by the free market, and to enable market elements that might otherwise not exist. Existing PTTs have tremendously underutilized assets that can be best deployed by restructuring existing markets into at least two tiers, wholesale and retail. Most PTOs exist primarily as “retail” providers of telecommunications services to end users (be they individuals or companies or governments) and there are very few actors in Africa markets providing wholesale services. As noted before, there may need to be a significant cultural shift for African PTOs to learn to trust an outside party, especially the PTO.
Execution of this restructuring strategy would not be terribly different from a typical leveraged buy out where a company is restructured and “non-core” assets are sold off. The strategy is shifted to focus on a smaller set of opportunities where the organization can be competitive and useful to the market.
Best use of existing assets aside, in order for progress to be made in Africa there are significant new investments that need to be made, and for which raising capital on international markets is a major challenge. When the PTT is operated as a standalone vertically integrated enterprise then, to investors, it is no different than any other market actor and must be evaluated against that peer group. Most PTTs do not qualify as good investments under such reviews; efforts to make the PTT seem attractive to private capital generally require market-distorting concessions from the regulator; these are no longer politically tolerable in an era of “deregulation”, nor can they be justified on economic terms. Efforts to invest foreign aid money into PTTs are generally criticized because of the market-distorting effects of injecting capital into a parastatal enterprise that would use that capital to compete directly with free market PTO enterprises. Only when the PTT has a mission that is not in competition with free market enterprises can an entity like the World Bank get involved “comfortably” without generating overwhelming political objections.
By giving the PTT a new mission that is complementary, not competitive, with other telecom ventures, the PTT can become a vehicle for building and operating infrastructure that requires long-term capital and has a slower payback than companies with small capitalizations and venture-class investors can afford to make. A PTT that is not asked to produce high profits, but instead is asked to produce results, is free to make these investments. Governments and their citizens can “afford” to invest their PTT assets in such a strategy and they do not necessarily have a better option. Asking the PTT to become a “venture class” investment that can compete for capital and skilled technical resources with private sector telecom ventures is not realistic. Hoping for a “white knight” international investor that will buy the PTT for millions of dollars is also not realistic. The bigger the PTT and the more difficult its situation (the PTTs of Nigeria and Kenya come to mind) the more unrealistic other options appear.
Specific Actions
To make the “new mission” concept more concrete let us examine some specific managerial actions that could be taken to execute this strategy. These are, more or less, specific recommendations that any PTT could execute to increase the likelihood of success for both itself, and all other telecommunications companies in its country.
Withdrawl from the retail market. The PTT should spin-off any mobile telephony unit it owns, probably by an asset sale to other mobile PTOs. For most PTTs the fixed line POTS network is in terrible condition and where this is the case it should be decommissioned and mobile operators should fill in the service gap created. Customers receiving voice telephone service on E1 (or greater) circuits should continue to be served but they can be transitioned to PTOs later.
Redirect fiber and high capacity (E1 and greater) assets to wholesale customers. In order to support a mass migration of retail customers to other networks those networks will themselves need to obtain tremendous new capacity. The PTT should provide fiber based connections to any PTO that needs them and should deploy capital, as it becomes available, to construct new fiber assets.
Act as a neutral exchange point. Multiple PTOs require mesh network topology to interconnect their own assets and to interconnect with each other. The PTT can play both roles efficiently by immediately operating a national mesh with an entirely transparent pricing regime (see below).
Offer transparent and level pricing and base price distinctions only on underlying costs. Publish all prices and sell all circuits to all customers in the same tier at the same price (volume customers can still receive an efficiency discount, but that discount should reflect real efficiency and not be used to simply favor the well-capitalized or large customer over the smaller customer). Price distinctions that favor certain geography should reflect real underlying cost differences only. I.e., if it cost more to deliver a circuit in a village than in the capital city then the price difference should be based on that cost alone. The PTT should offer services where they are demanded and not bias the market through differential pricing that is unnecessary.
Offer all services on a prepaid basis. One of the distortions in the marketplace is that certain customers may, in theory, pay the same prices that others pay, but they, in fact, do not pay their bills, and therefore do not pay the same prices others pay, if they every pay at all. Furthermore, delivery of service “on credit” penalizes other companies that might in fact deliver service at a lower price or deliver better service at the same price but cannot afford to support credit and credit risk. The African PTT has traditionally tolerated bad credit performance from government and various parastatal enterprises and this must stop in order to create a fair market and in order to properly fund the PTT itself. A “no-credit” policy is entirely appropriate for the PTT in this new role where it no longer has to compete directly with PTOs. If the market demands credit from telecom companies then PTOs or banks can decide to offer credit; there is no reason for the PTT to offer credit.
Open up central office facilities that are of suitable quality and offer collocation facilities to any customer; both carrier and non-carrier customers should be accommodated. These facilities should not be treated as a scare resource that limits their availability; the PTT should expand and build to meet the demand for such faculties. As is the case with all other prices, the pricing of these facilities should be published, transparent and customer neutral.
All traditional voice switches should be used for two purposes. Some PTOs may be interested in buying such a switch to groom voice traffic and interact with upstream carriers. The PTT itself should offer international voice services and may need to provide a clearinghouse function between different PTO networks until most PTO-PTO traffic migrates to private interconnects negotiated bilaterally.
Voice services should be sold at market prices. There is no reason why the PTT can’t access international markets at the most favorable rates by aggregation of all traffic, but if it tries to sell at unrealistic prices then PTOs and end-customers will bypass it and use international capacity to do so. The loss of aggregation and scale will be wasteful of limited international bandwidth and serves no economic purpose. Similarly, bringing London/New York pricing to the local economy will have a tremendous economic benefit. Selling voice services at cost + $0 is appropriate to a revised PTT mandate to “deliver results, not necessarily profits.”
Interconnect all satellite assets with fiber and offer an aggregated satellite access product to all customers. While some satellite dishes are used to support remotes parts of the country larger assets (such as Standard-A and Standard-B earth stations) tend to be located where telecommunications services are in high demand. These areas should be connected by fiber and the satellite dishes should be, as much as possible, repurposed to be used for international access.
Manage satellite links so that traffic aggregation and aggregation of transponder and circuit grooming can occur efficiently. Having twenty customers aim small satellite dishes at a transponder, with each receiving an E1 to “somewhere”, is wasteful of resources relative to having a single E3 circuit with breakout of traffic occurring outside the space network. By operating a centralized termination farm in a competitive market such as London or New York the PTT can more efficiently offer African customers the short list of products that they want. It makes no sense for end customers to collectively order dozens of point to point circuits when, in fact, the only telecommunications services most are accessing are telephony and Internet bandwidth. Some customers will insist on “private line” services based on their own internal obsolete networks and they can be accommodated through services such as MPLS based VPNS. Again, scarce satellite resources should be highly managed and the PTT can take on this task and give the market access to services at prices much closer to global norms while utilizing capital-intensive assets based on criteria of maximum efficiency, not maximum profit.
Focus most new physical network development on offering dark and dim fiber facilities to sophisticated PTO operators that develop next-layer services. Construction of fiber assets requires capital and civil works construction expertise, access to rights of way and management of outside plant network mapping and OSS management tools. While these skills may be in short supply they typically can be found within the PTT and they are the building blocks of greater network capacity. Nothing is more costly than duplicate physical network construction activity on routes that extend for 100’s or 1000’s of kilometers. Sharing fibers and wavelengths efficiently is the only way Africa can afford to build regional intercity and cross border networks and these are crucial to efficient delivery of limited international fiber bandwidth to landlocked and poorer countries and they are crucial to the development of regional trade. A primary goal of telecommunications development in Africa should be to insure that it does not cost more to do business with a next-door neighbor than it costs to do business with someone in London, Paris or New York. It will take a dense mesh of regional fiber networks across Africa to achieve that goal.
Employees
It is a fact that most African PTTs are bloated bureaucracies with under funded pension plans. An organization that is trying to support too many employees can rarely treat all employees fairly. Thanks to decades of mismanagement, even good employees are often involved in fraudulent activity. Dealing with these facts is so difficult that the issue has been a significant obstacle to several privatization efforts.
A healthy PTT which is following the strategic plan outlined above will need vastly fewer employees than it has today. While many PTT employees are “non productive” in their positions within the PTT they do have skills and familiarity with the telecom business. If they cannot themselves become business leaders they can find new employment in the telecommunications sector if, in fact, there is growth in the telecommunications sector. Part of the purpose for restructuring the PTT is to allow the whole sector to grow into a complex multi-layered market. Without question this type of growth can absorb most, if not all, of the employees that must be eliminated from the PTT.
In order for new companies to be created to deliver services the PTT no longer provides, and in order for existing PTOs to grow to hire newly available staff to deliver services, there needs to be a round of investment capital pumped into the sector to fund enterprise formation and expansion. The PTT cannot provide financial capital but it can provide strategic capital that creates leverage. For example, in the spin-off of certain assets the PTT can support ex-employee group formation for purposes of making offers. In recognition of underfunded pension plans the PTT can pay pension obligations in the form of credits for telecommunications services. Some of these credits can be in the form of office space and, more importantly, network interconnection assets. These services would provide ex-employees with a form of “incubation” support that would increase the chances of success of the new enterprises launched by (teams of) ex-employees. Employees who wanted to retire or move out the industry could sell their allotments for cash to other employee groups that were trying to accumulate significant assets to support an enterprise of some scale. For example, as the POTS telephone business is replaced by one in which only E1 and IP delivered voice services are available, thousands of enterprises may need to acquire PBX systems. If each sale requires paying installation fees to the PTT (or a PTO) the startup that has credit worth several hundred installation charges with the PTT might enter the market with a strong competitive advantage, one that can help overcome the first year challenges of a new enterprise.
Without a doubt the collapse of the PTT will have an impact on many employees, but much of this is inevitable as the financial instability of the current structure plays out; a plan that turns the restructuring of the PTT into a growth stimulus to the sector, so that the most productive employees return to the sector in entrepreneurial roles, would be a positive outcome.
Using the breakup/restructuring of the PTT to stimulate the creation of new telecommunications ventures in a country can help solve problems created where the PTT has been partially privatized. The problem with any privatization initiative that has already been undertaken is that the government has made representations to private investors and their shareholder rights must be respected. Depending on the exact set of circumstance in any specific case, private shareholders will have purchased equity (typically a minority stake) in the PTT with some expectations of a return on that investment. The strategy outlined here will not generate that return; certainly not in the time frame and amount that the investor likely expected. However, under these circumstances the PTT can demand equity in the ventures created by ex-employees that accept “in kind” concessions from the PTT. These equities can be distributed or held as an aggregated pool; the equity stakes of non-government investors (the private investors) would be exchanged for pro rata stakes in this pool. If the PTT was going through a “bankruptcy” process such an outcome would probably be viewed as generous and the equity holders should consider themselves lucky. It is possible that a PTT that is not in “crisis” and undertakes this strategy might find some resistance from investors who had greater expectations; however, it is likely that a sufficiently attractive package can be developed to win their approval.
Summary
The plan outlined herein is one where the PTT is restructured and downsized such that it addresses only unmet needs in telecom, and it allows PTOs to operate free of any competition from, indeed with the support of, the PTT. PTT assets that are not core to a “wholesale” mission are sold off to others, including ex-employees of the PTT, many of whom will leave to form new ventures using their skills, and some non-financial assistance from the PTT in consideration of their vested rights as employees. Similarly, any financial investors in the PTT will have their positions exchanged for an equity package in many new telecom ventures created by the breakup. The resulting PTT would be a 100% government owned non-profit public interest corporation chartered by the regulator to “fill in the gaps” in a nation’s telecommunications infrastructure. PTOs would be free to ignore the telecommunications assets this new organization would bring to the wholesale market, but because these assets would be priced based on cost and sustainability, not with a view towards profits, few would do so. As long as the services the new PTT offers are provided efficiently, transparently and fairly, they will lower the total cost of telecommunications services in the retail market through both efficiency and increased completion.
February 20, 2006
Roland H. Alden is a telecommunications consultant active in Africa and the Middle East; he can be reached at ralden@ralden.com.