Telkom may spin off copper network - TechCentral

Telkom may spin off copper network

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Telkom may be planning to spin off its copper-based network assets into a special purpose vehicle (SPV), a speculative news report suggests, but it’s unclear why the company would agree to such a move.

In an entry posted late on Thursday night, a consumer forum site, MyBroadband, said it had spoken to unnamed sources — the website didn’t explain why these sources would have knowledge of the situation — who had told it that Telkom could make an announcement about the SPV plan as early as next month.

Telkom itself is being coy about the speculation. The company tells TechCentral that it is “in the process of redefining its commercial and broadband strategy, with significant commitment to making a meaningful contribution to the nation’s social and economic objectives”.

“These will be considered in consultation with our key stakeholders and will be communicated at the appropriate time,” it says.

Last month, TechCentral revealed that the Competition Commission had reached a settlement with Telkom in terms of which the telecommunications operator had agreed to “functional” (operational) separation of its retail and wholesale divisions.

But it’s far from clear if a plan to spin off Telkom’s copper assets into an SPV — if that is indeed what is happening — is in any way related to the agreement with the commission, which also imposed a R200m fine on the company for anticompetitive abuses committed between 2005 and 2007. Details of the settlement have not been disclosed.

In the UK, BT Group (formerly British Telecom) achieved notable success by spinning off its access network into a company called Openreach, which provided services to all industry players on a non-discriminatory basis. Openreach is heavily regulated by Ofcom, Britain’s equivalent of the Independent Communications Authority of South Africa (Icasa).

But telecoms consultant Dirk de Vos cautions that if Telkom is proposing spinning off its copper assets into an SPV, it doesn’t appear to be nearly as far-reaching as the Openreach arrangement. “Openreach is the entire wholesale network,” De Vos says. “From what I can see, this is just the copper network, so it really seems like more about giving effect to the local-loop unbundling obligations.”

In terms of local-loop unbundling (LLU), the implementation of which has been delayed for years, Telkom would be forced, at least partially, to open its “last-mile” copper network into homes and businesses to rival operators and Internet service providers. Icasa has said it will have unbundling regulations in place by the first quarter of 2014, although the process has been delayed many times already.

Internet Service Providers’ Association regulatory adviser Dominic Cull has a similar view to De Vos. He says spinning off the company’s copper assets is quite dissimilar to what happened when Openreach was created. “This is about taking an underperforming asset [Telkom’s copper network] and putting it into another company because it’s costing money and there’s a desire to isolate it.”

De Vos says that if an SPV is created, it could be done on the basis of a public-private partnership. It could also be a way of “pushing many Telkom employees to the SPV and then having the SPV do the retrenching”. Telkom has conceded in the past that it is overstaffed, but reducing the size of the workforce is difficult given that government remains the company’s largest shareholder. Even under a separate entity, it may be difficult to cut headcount.

Dirk de Vos

Dirk de Vos

One possibility is that Telkom’s new management team wants to wash its hands of the loss-making part of the company by effectively handing the SPV to government, forcing government to subsidise it if it wants to retain staffing levels, De Vos says.

Tim Parle, senior telecoms consultant at BMI-TechKnowledge, says that if Telkom is planning an SPV-type deal, it is important that it defines it properly. “Does Telkom use lowercase or capitalise each word when it says SPV? Because there could be a difference between using it as a generic term or using it to mean something specific. If I recall, an SPV is designed to isolate financial risk.”

Parle says Openreach has been hailed as a success, but it isn’t without problems. It doesn’t deal directly with end users and any complaints they might have. Nevertheless, Parle says the Openreach model is “certainly something other operators are looking to follow” and Telkom “has followed the progression of European incumbents in terms of moves to next-generation networks, so moving to an Openreach model could make sense”.

In South Africa, there is also the question of scale to consider. “There are in the order of 800 000 [broadband]DSL lines out of 4m lines in service, so around 20% penetration. But in the UK there are 25m lines in service and around 70% DSL penetration.”

He adds that under the umbrella term of SPV, there are many different approaches Telkom could take.  — (c) 2013 NewsCentral Media

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