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Feeling unEASSy about telecom cartels

Telecommunications consultant Roland Alden has an excellent essay on EASSy, the fiberoptic submarine cable proposed to link East Africa to the Internet, connecting a number of countries that currently access the Internet via high-priced satellite connections.

How can a plan to connect African nations to the net at much lower costs be a bad thing? Simply put, it doesn’t lower the costs nearly enough. As Alden observes:

EASSy would lower the cost of Internet access for these citizens by 50% to 75%. That sounds good, until you understand that by global standards it is shockingly inadequate. Internet bandwidth in Africa is not two or three times more expensive than in global competitive markets, it is 2000 or 3000 times more expensive.

Why’s the connectivity likely to be so expensive? Because EASSy is currently planned to operate financially with the same cartel structure used for the West African SAT-3 cable. While this high-capacity cable connects over a dozen nations with moderate to high bandwidth demands, it’s very sparsely used. Why? Because the owners of the cable – former state-owned telecom companies in Africa and major international telcos – have agreed to fix the prices for bandwith so high that most African entrepreneurs choose to use expensive, slower satellite connections than pay the extortionate monopoly rents demanded by the SAT-3 owners.

Those of us who hope that the revolution in voice connectivity we’ve seen on the African continent, brought by entrepreneurial cellphone companies, spread to data connectivity can’t help but be frustrated that EASSy is based on such an uncompetitive structure. Telecommunications companies have been suing the SAT-3 consortium for competitive access to their cable; early evidence suggests that the SAT-3 pricing structure is preventing businesses from using the capacity of the cable. Why would EASSy try to replicate the same bad situation?

4 thoughts on “Feeling unEASSy about telecom cartels”

  1. This monring i woke up to a mail from a friend (Jim) about the above essay on EASSy by Roland asking for my reaction if any.

    My response was “Am compelled to read the essay and Roland, we all know EASSY is a problem – you and Richard (another constructive critic) articulate that very well but i would rather that you focus on how we fix it because it is not GONE yet. I can tell you authoritatively that the funding for EASSy by the WB was approved until suddenly someone highup there heard the noise we have being making especially regarding the failure of SAT3 and why EASSy must not follow that trend then they said lets hold on.”

    I cced Roland on that mail and he resonded “Eric, your point is well taken. I’m on it.”

    Thats was for the morning so after my meetings i just came back to e-mail and found ” Ok, I took you up on your challenge, indirectly. I did not address
    specifically the notion of “fixing” EASSy but I have gone a fair distance from throwing stones at “what’s wrong” to addressing the question “what should be done?” Same page – http://www.ralden.com/C1/EASSy/; just scroll down and this is what you would find;

    Public Finance of Telecommunications
    by Roland H. Alden

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

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

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

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

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

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

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

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

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

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  3. Dear Ethan,

    I have referred to your blog on EASSy in a post to our i-network list in Uganda preparatory to the workshop to be held tomorrow (Tuesday). I didn’t have your email address so am responding to your blog, copying and pasting the message.

    Kind regards, Daniel Stern

    Dear All,

    Having read through the background document and proposed programme, I would like to suggest that presenters and delegates take into consideration
    concerns expressed by no less a personage than Geekcorps founder http://www.geekcorps.org and Berkman Center for Internet and Society at Harvard Law School http://cyber.law.harvard.edu/home/ fellow, Ethan Zuckerman, as well as other like-minded experts whose experiences sounded warning bells about EASSy, some of which are described in the attached essays. If the pressing issues touched upon in the essays and blogs that are referenced in this message can be properly addressed during the presentations and/or discussions during question and answer time, then I have hopes that the Uganda National EASSy Workshop can make a meaningful contribution towards making EASSy a success.

    You should be able to see from reading Zuckerman’s blog, ‘Feeling UnEASSy about Telecom Cartels’ http://ethanz.wpengine.com/?p=247, that unless those managing the EASSy project change (or have already changed) direction and adopt another paradigm for generating revenue streams – from the old, closed, controlled, top-down, centralised incumbent telco model to one that is more consistent with the age of information and the Internet, i.e. open, decentralised, competitive, and technology neutral http://afrispa.skybuilders.com/users/eric/blog.html, EASSy’s financial operations will almost certainly replicate the same cartel structure used for the West African SAT-3 cable (whose data rates are only marginally lower than satellite). Zuckerman urges those seriously interested in bringing African Internet bandwidth prices substantially lower through the EASSy project (he states that current Internet bandwidth prices here in sub-Saharan Africa are 2,000 to 3,000 times more expensive than global market prices) to read the essay, Just Say No to EASSy by Telecommunications consultant, Roland Alden. (In the BBC article, Warning over African internet
    Balancing Act’s Russel Southwood says, “Rates on Sat3 have been as high as
    $25,000 per Mb per second per month but are now around $10-15,000. The
    actual cost to the operator is around $2,000”.

    I would encourage delegates planning to attend the Uganda National EASSy Workshop to read the attached ‘foreground’ information on EASSy. When you read Zuckerman’s blog you will see that, far from ‘throwing stones at EASSy’ as some have accused him of, Roland responded to AfriSPA Executive Secretary and Stanford University Fellow, Eric Osiakwan’s challenge by writing a second essay, Public Finance of Telecommunications in which Alden painstakingly delineates the reason d’etre for such a project as EASSy and puts the ownership of the project into perspective, i.e. into the public domain. TESPOK and KIXP founder, Richard Bell’s essay about Public Private Partnership, also alluded to in the blog, adds support to the Public Finance thesis and is also included as part of the attached ‘foreground’ material. (Incidentally I’ve forgotten the name of the bank that was poised to provide major funding for the project that recently pulled out because its managers saw that EASSy seemed to be headed in the direction of SAT-3. Can anyone tell me which bank that was? Has any progress been made on finding alternative funding?)

    I sincerely wish for the success of EASSy and/or other similar projects aimed at building Internet backbone in Africa and significantly lowering Internet bandwidth prices for end users. At the same time I would caution those with a vested interest in keeping bandwidth artifically scarce through uncompetitive pricing strategies such as was done in creating the cartel structure used for the West African SAT-3 cable beware that the world – and prospective funders are watching.

    I wish the organisers and participants of the Uganda National EASSy Workshop every success.

    Kind regards, Daniel Stern

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