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Sunday, February 1, 2009
Tedious Telkom

The South African government has identified SA's high telecommunication costs as one of the stumbling blocks to sustainable economic growth and development. High cost of broadband coupled with low speeds have resulted in the Internet being more of a disabler than an enabler relative to more technologically advanced countries. Even a country such as Morroco with a GDP of $73bn has an internet penetration rate that is more than 10% points higher than South Africa's 10.5%. South Africa had a GDP of $278bn in 2007. (Sources: GDP, Bloomberg; Internet Penetration, internetworldstats.com).

Most readers would be well aware of the announcement by MTN and Neotel, South Africa's second fixed line operator, of their intention to build a joint 5 000km national fibre-optic network for the estimated sum of R2bn. This project marks the biggest collaboration between companies in the South African telco space and will result in savings between R400-R500m for the network operators and benefit end users through increases in speed, quality and ultimately reduced costs. The first leg of the project will connect Gauteng to KwaZulu Natal with a direct link to Mtunzini, which is the landing point of Seacom, the 13 500km undersea fibre-optic cable that will link South Africa and five other East African nations to India and Europe. Whereas MTN and Neotel will be both the owners and predominant users of capacity on their national fibre-optic cable, Seacom separates ownership from use of capacity, which will allow for total independence. Even though last week's news will have a visible impact on South Africa's telecommunications environment in time to come it is small fry compared to the sheer scale and potential impact of Seacom.
The $650m undersea cable, which has a completion deadline of June 2009, is a state of the art, privately funded project with a capacity of 1.28Tb/s, or around 10x the capacity currently available on SAT3, the only undersea cable linking South Africa to the rest of the world. Investment in the project is 76.25% African and 23.75% international. The project is fully funded with debt and equity, with project debt provided by Nedbank Capital and Investec Bank.
As mentioned the deadline for the project is June 2009 and according to the Seacom penalties are to be paid by the cable builder and layer if it is not met, which at least puts some certainty on the delivery time. Why this sudden need to lay fibre-optic cables, both on and underground?
One could argue that the change in the way the Internet is consumed is driving this demand. Users are making ever more use of file sharing and streaming video applications on a 24/7 basis, both for business and personal use. These kind of services now account for 60% of global internet traffic and projects such as Seacom, through its increased capacity and speed capabilities will enable South Africans to experience these type of applications the way they should be.
The consortium's strategy is to develop a high volume, low cost market that will encourage a significant step-up in demand, which will be an enabler for the formation of further industries, thereby stimulating further demand. The call centre and business process outsourcing industry should be obvious benefactors down the line.
Seacom states that it has already presold most of its capacity and promises its pricing to be 90% less than current fibre pricing. This could result in significant financial savings for consumers if South Africa's network operators decide to pass their reduced input costs on to clients. One thing is certain, speeds will drastically increase but we would argue that price reductions will be slow at first, which will result in an increase in margins for the cellular operators at the expense of the SAT3 operator Telkom, but over time competition in South Africa's new liberalised market should do the inevitable.
Last month's  MTN-Neotel announcement is a good starting point. By Philipp Wörz of Alphen Asset Management

Copyright © Insurance Times and Investments® Vol:22.2 1st February, 2009
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