Poor orphaned Neotel

Almost two years after being awarded its licence, Neotel has little in the way of a visible market presence. If I were a shareholder, I would seriously be considering my options.

There are no customers, no services and few of the promises that were made to entice investors have materialised. The continuing dialogue between Neotel and the various government departments has brought the company no satisfaction, leaving the country without any form of a viable alternative to Telkom.

In short, Neotel has become the poor orphan of the telecommunications sector, eliciting the worst reaction from business: pity. This has left many wondering whether it is worth continuing with the operation.

The creation of a second national operator was a long and torturous affair that, at times, bordered on the farcical. The pain and hysteria seem to be continuing unabated.

Ostensibly government's aim was to bring down telecoms prices through the introduction of competition to Telkom. This would take place at a controlled level, allowing the incumbent to transform itself from a stodgy state-owned enterprise to one that can compete. Also, the new entrant had to be protected during its start-up phase to allow it to become a strong rival.

At the same time, there was the paternalistic view that consumers had to be protected from unscrupulous operators if full-blown market liberalisation had to occur. So the concept, or policy, of "managed liberalisation" was touted by the Department of Communications as the way to go.

Unfortunately, the phrase "you can't be a little bit pregnant" comes to mind here. The process of bringing competition to cut prices has been so controlled that little real movement has happened. Certainly, Telkom has become more business-like in its approach, but this has focused on business and consumers, while small companies have not seen cost reductions.

The poor still pay the highest rates and small ICT companies pay millions of rands to have their Web sites hosted overseas, because it is cheaper.

The creation of a second national operator was a long and torturous affair that, at times, bordered on the farcical. The pain and hysteria seem to be continuing unabated.

Paul Vecchiatto, Cape Town correspondent, ITWeb

Initially, Neotel was supposed to have the fibre optic cable network developed by Transtel and Easitel, apart from Transtel's metropolitan networks. Public enterprises minister Alec Erwin snatched the national system away at the last minute in July 2005 and it is now the backbone for Infraco, his department's low-cost broadband infrastructure provider.

According to the old Telecommunications Act, government did have the option to pay cash for its indirect 15% stake in Neotel. However, the real attraction for investors was to have access to a full service network and so give the new operator a jumpstart in its infrastructure roll-out.

The cash option seems to be only used when Neotel investors have to pay in to keep the company operating and it has not been paid over as a lump sum. And pay in they must certainly do, because Neotel has 200 employees and it is due to receive another 600 from Transtel.

Neotel's ongoing discussions with government have been unproductive. It was promised a four-year exclusivity deal to resell Infraco's services, but this has now been cut to two. Anyway, what's the point of being a telecoms company if you do not have control over your own network?

Government also seems to be intent on stymieing its attempts to land undersea cables, with communications minister Ivy Matsepe-Casaburri's announcement that she wants such cables to be majority-owned by South African companies.

Neotel has a small stake in the East African Submarine Cable System and has formed an alliance with Seacom. However, whether these will be allowed to land is still open to question and we will only have a better understanding once the guidelines are issued.

It is in the process of completing its trial of a CDMA wireless consumer service, but one wonders if this offering will be enough to capture customers' attention.

Finally, the market and regulatory regime has changed dramatically since Neotel was licensed. The new Electronic Communications Act offers it no protection. The licence convergence process does not guarantee that it will enjoy the equivalent of the full public services telecoms network status it now has.

During a break in a parliamentary session, I once asked a senior ICASA councillor, half in jest, if Neotel would get a refund on its R20 million licence fee if it were not awarded the equivalent of a full licence. The choking over the cup of coffee said it all.

The whole saga is sad, for Neotel and the country, never mind the continuing high communications costs. It has also provided a poor case for the future of foreign direct investment.