UUNET (SA) (PROPRIETARY) LIMITED

TEXT OF SPEECH MADE TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON COMMUNICATIONS IN RESPECT OF THE TELECOMMUNCIATIONS AMENDMENT BILL

UUNET (SA) (Proprietary) Limited, a wholly owned subsidiary of WorldCom welcomes this opportunity to make this oral submission to Parliament on the Telecommunications Amendment Bill.

WorldCom is a global provider of telecommunications and value added network services. Based in the United States of America, WorldCom has operations in the America's, Africa, Europe and the Asia specific region, including offices in more than 65 countries.

WorldCom is a significant stakeholder in the South African Value Added Network services sector having acquired 100% ownership of UUNET (SA), one of South Africa's leading Internet Service Providers ("ISPs").

The most successful telecommunications industry in South Africa is the Internet industry, which owes its success to the Telecommunications Act, 1996 and to the various rulings issued by ICASA pertaining to the VANs industry. This certainty has created a market in which all other ISPs have approximately 80% of the market whereas Telkom's ISP only has 20%. This thriving industry has in turn significantly contributed to economic growth, employment and industry development. UUNET (SA) alone employs over 260 employees thanks to the Act and this figure fails to take into account all of the other employment opportunities offered by other VANs providers. UUNET (SA) has also generated an international investment of R1.25 billion in the telecommunications sector and has implemented an ongoing skills transfer programme. The South African Government has now embarked on a process to put into place the legal mechanisms for the managed liberalisation of the sector. UUNET (SA) is concerned that should the proposed Telecommunications Amendment Bill which is intended to create the necessary framework for this process be passed in its present format that many of the industry gains to date will be lost.

The stated purpose of the Bill is to:-

• provide for the managed liberalisation of the telecommunications sector post Telkom's exclusivity;
• amend the existing Telecommunications Act 103 of 1996 in line with industry and technological developments and international trends;
• facilitate Telkom's IPO.

The initial foundations for the managed liberalisation of the sector were laid with the publication of the White Paper in 1996 and the subsequent incorporation of the White Paper's principles in the 1996 Telecommunications Act. Instead of following the trajectory set by the White Paper and the existing Act, the provisions of the Bill will detrimentally undermine the 1996 vision of affordable communications for citizens and businesses alike through the creation of an economically vibrant and growing telecommunications sector due to certain provisions in the Bill amounting to no more than an exercise in backsliding.

The shift away from the 1996 policy framework will have devastating consequences for foreign and local investors who given the assurances of certainty in the White Paper in respect of the Regulator's independence, South Africa's commitment to its WTO obligations and the promise of market liberalisation beginning with the VANs industry in 1996 and within set time frames for further liberalisation going forward, invested substantial sums of money into the sector. The full impact of this shift in policy will be mainly felt by the VANS industry. Worldcom's investment of R1.25 billion in UUNET (SA) which was premised on the provisions of the White Paper, the 1996 Act and ICASA's various rulings on VANS services and other matters pertaining to the VANS industry will be lost due to UUNET (SA) being constrained, if not altogether prevented from providing the services which it currently provides due to certain provisions contained in the Bill.

The most significant departure from the present framework is to be found in those provisions of the Bill which expropriate without compensation or on a discriminatory or arbitrary basis deprive VANS providers of their existing rights in violation of section 25 to the Constitution.

• The definition of "telecommunication facility" is expanded to encompass collocation space, racks, rights of way and cabinets. This expanded definition when read with the provisions of section 40(2) of the existing Act which obliges VANS providers to exclusively use telecommunications facilities provided by Telkom will result in VANS providers being deprived of their existing right to self provide on-premise equipment and facilities. The effect of this provision constitutes an expropriation of property in favour of Telkom and the SNO in violation of section 25 of the Constitution. If such an expropriation occurs, VANS providers would be entitled to look to the State, Telkom or the SNO for compensation, the extent of which will be substantial and the impact of which should be borne in mind given the Government's desire for a successful Telkom IPO. The definition will also result in the obliteration of a thriving equipment supply industry, which was seen in the White Paper as a vital means of generating employment and the global development of the country's economy [section 1(h) of the Bill read with section 40(2)]. Lastly, the numerous draft policy directions never intended to expropriate existing rights. The whole intention of such policy directions was to cater for the liberalisation of the telecommunications market and not the stricture thereof.
• The definition of "PSTS" has been widened to extend exclusivity to the supply of customer premises equipment and to the maintenance and repair of such equipment or any such equipment provided or maintained by a PSTS operator for the purpose of providing any telecommunication service. The breadth of this definition is so sweeping in effect that existing non-exclusive services such as VANS will now fall within the exclusivity afforded to Telkom and the SNO as providers of PSTS. Thus, VANS providers will be deprived of their existing right to maintain and repair their on-site equipment and to thereby offer a competitive service to customers. The definition is in violation of section 25 of the Constitution and is unworkable and contradictory in application (i.e. section 36B specifically excludes customer premises equipment) [section 36A, section 34(2)(c) substituted and conflict with PSTN in section 36B(2)]. Lastly, the numerous draft policy directions never intended to expropriate existing rights. The whole intention of such policy directions was to cater for the liberalisation of the telecommunications market and not the stricture thereof.
• The new definition of "virtual private network" ("VPN") goes directly against ICASA's ruling that VPN's are a lawful form of VANs service in terms of section 40 of the Act and the Minister's policy direction that VANs can offer VPN services subject to the limitation on voice. VPN's have now been categorised as a form of PTN. As such, VPN services will be subject to the restrictions imposed on PTN's . As PTN's are defined in section 41(1)(a) of the Act as a service to be used "principally or integrally" for the operations of the PTN provider, VANs providers will be deprived of their existing right to provide VPN services to their customers in violation of section 25 of the Constitution. [Section 1(q) of the Bill read with section 41(1)b(ii)].
• The deletion of the reference to "value added network service" and the substitution thereof by a reference to "electronic transaction service" is highly problematic for a number of reasons. Firstly, it has taken ICASA over five years to set the boundaries for VANs services and seriously undermines the role to be played by ICASA as independent regulator of the industry as envisaged in both the White Paper and the existing Act. Secondly, it fails to give effect to the intention of the policy direction which was to grant VANs providers the right to provide "end to end electronic services". Instead, the definition narrows the scope of VANs services to electronic processing transactions and deprives VANs providers of their acknowledged and existing right to provide a wide range of services in terms of which the conveyance of signals is no more than incidental to and necessary for the provision of that service [section 40(2)].
• The exclusive grant to Telkom, the SNO and SMME's to provide VoIP is contrary to the time frames set for the liberalisation of the telecommunications sector and the provisions of section 36(3) of the existing Act. Section 36(3) of the Act read with the provisions of Telkom's licence, limits Telkom's exclusivity to certain elements of the PSTS:-
• national long distance telecommunications service;
• international telecommunications service;
• local access telecommunications service;
• public pay phone service.

• the elimination of effective competitors to the detriment of consumers;
• an unwarranted incursion on the right to freely receive or impart information or ideas as enshrined in section 16 of the Constitution.
• The definition of "resale" would appear to limit resale to PSTS operators contradicting section 40(4)(b), which permits VANs providers to resell their services on leased facilities to customers. The categorisation of VPNs as a form of PTNs will make VANs providers subject to the prohibition on resale in section 41(5)(a)(i) thereby depriving VANs providers of their existing rights in terms of the Act. Although no reference is made to resale in the numerous policy directions, this restriction on resale is in contravention of South Africa's WTO commitments to liberalise resale by 2003.

A further significant departure from the present framework is the usurpation of a number of ICASA's powers by the Minister. The White Paper, the Act and the ICASA Act are reflective of South Africa's commitment to:-

• its WTO commitments to establish and maintain an independent industry regulator;
• jealously guard the independence of such regulator from organisational, Governmental and private sector interference.

By allowing the Minister to play a greater role in the licensing of operators, the regulation of interconnection agreements and in determining the considerations for universal service, the provisions of the Bill border on an unconstitutionally excessive delegation of powers to the Minister. This is in contravention of South Africa's WTO obligations to ensure independent regulation of the sector. Such a violation will:-

• adversely impact on South Africa's ability to attract much needed foreign investment to the sector;
• undermine the perception of ICASA as being an impartial and unbiased independent regulator as the Minister's increased role in the regulation of the industry will inevitably be seen as being partisan due to the Government's various stakeholdings in Telkom, the SNO, Vodacom and Sentech;
• hamper the activities of VANs providers who are heavily reliant on the protection of an independent regulator from abuses of dominant players.

UUNET (SA) is also concerned that the amendments to section 43 of the Act will make it impossible for them to obtain the essential facilities required to provide VANs services on fair and reasonable terms and will ultimately result in the demise of their business activities.

• section 43(1)(a)(iii) requires VANs providers to obtain facilities from Telkom on a reciprocal basis. This is impossible as Telkom and the SNO are the only entities authorised by the Act to engage in the provision of telecommunication facilities;
• section 43(10) which stipulates that contracting parties are only entitled to review the terms and conditions of interconnection and facilities leasing agreements after a period of five years from the date of the conclusion of the agreement.

The cumulative effect of all the provisions pertaining to VANs providers in the Bill will result in the total elimination of the VANs industry from the telecommunications sector. This will impact negatively on economic development, the generation of employment, consumer welfare and on the access of citizens and corporates to communications. The latter impact will amount to no less than a violation of the right to receive or impart information or ideas as enshrined in section 16 of the Constitution.

In view of the aforesaid, Parliament is urged to ensure that:-

• the requirements for Telkom's IPO do not take precedence over other industry players to the detriment of the continued well being of the sector;
• the short term actions as drafted in the Bill do not ultimately harm or influence future foreign investments as foreign investors, based on the implications of this Bill, question the validity of current regulations versus potential regulations in the future. This sets a negative precedent;
• deference is afforded to the Constitution and South Africa's WTO obligations.