Industry Trend Analysis - Higher Industry Risks From State Infrastructure Consolidation - SEPT 2017

BMI View : Pooling state-owned broadband infrastructure to ensure better targeted rural investment is a laudable goal, but proposal s to merge two state-owned players seem more politically- than commercially-motivated. I ncreased Industry Risk would be seen as the state would tighten its grip on key resources as it lacks the expertise to fully exploit this opportunity.

Reportedly, the South African government plans to merge its wireline broadband infrastructure business - Broadband Infraco - with its broadcast signals distribution provider, Sentech. The aim is to eliminate duplicated network elements and allow for a more focused and cost-effective expansion of broadband platforms into rural areas where only basic 3G/4G mobile connectivity is available. This would be in line with moves seen in other markets, where the state has felt compelled to become directly involved in the management and operation of advanced infrastructure by consolidating resources. In this particular case, however, we do not believe the market would be well-served by further government participation.

3G/4G Meets Basic Needs For Broadband
South Africa: 3G/4G & Broadband Forecasts
e/f = BMI estimate/forecast. Source: BMI, ICASA

Infraco is the second-largest wireline infrastructure owner-operator in South Africa and plays a vital role in allowing private Internet service providers to deliver services to consumers and businesses over its dark fibre network. However, under state ownership, it has struggled to invest in expanding and augmenting its network; a similar story has been playing out at Sentech in recent years and we are not confident that the government could both finance a merger and develop a more commercially-facing business model, as well as profitably expand coverage.

Of greater concern, however, is that this move would further consolidate the state's control over access infrastructure and place vital resources beyond the reach of private investors. Through its national integrated ICT policy, the current administration has attempted to neuter the influence of commercially-orientated players in the telecoms sector. It has stepped back from ill-judged plans to recover spectrum from mobile operators as well as reserve exclusive rights for future 4G/5G services for a national, state-owned wholesale provider. It has also rebuffed Vodafone's efforts to buy Infraco and return it to profit.

Poor Regulations, State Intervention Weigh On South Africa
Sub-Saharan Regional Average Industry Risks Scores, Q417
Note: Scores out of 100, with high scores denoting low risk. Southern Africa average includes South Africa. Source: BMI

In 2016, we downgraded South Africa's Industry Risks score within our Telecoms Risk/Rewards Index (RRI), reflecting the more hostile operating environment for privately-owned players, and for foreign-owned players in particular. Consolidation of infrastructure players is also a risk for equipment vendors as the move usually removes a potential client from the market and the surviving player must defer or scale-down its capex commitments while it goes through the integration process. The mandate to emphasise rural coverage is laudable, as it has the potential to bring many hundreds of thousands of consumers and businesses into the digital economy, but we believe the South African government would struggle to subsidise infrastructure investments and the enlarged infrastructure company would fail to achieve many of its objectives.

South African broadband coverage is poor, even by regional standards, and it is appropriate that the government look for solutions to expedite broadband expansion. 3G/4G coverage is high, but offers only basic connectivity due to spectrum limitations. High-speed fibre is available but has limited reach as a last-mile solution thanks to under-investment at Infraco as well as incumbent Telkom. It has been left to independent players such as Liquid Telecom and Blue Label to commercially exploit untapped demand for high-speed broadband services, but this has mostly focused on urban and business park environments.

We believe clearer regulation and private sector investment incentives would be more effective tools than direct state intervention in the market. Should the latest proposals come to pass, then we would consider further downgrading South Africa from an RRI perspective.