Nation building

Country has huge potential as a new nation, & this opens up opportunities for telecom
South Sudan holds significant potential for operators.
South Sudan holds significant potential for operators.

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South Sudan has claimed for itself the rare opportunity of starting afresh. Now, it can study the successes and failures of all other 196 world countries (give or take a few, depending on who is counting) and leverage those lessons to build the best country for its people. How exciting it must be to start unencumbered by history, national debt or bickering politics – and at the same time how challenging to mould a country without having past references to guide you. Will South Sudan get it right?

The process of becoming the newest country in the world has not been easy for South Sudan, and it is still contending with conflicts with the North. But now the new South Sudanese government has the power and the responsibility of taking a clean slate and laying the rules for all aspects of its economy: infrastructure, education, healthcare, regulation – just to name a few.

Not many have had this opportunity. Since 1990, only 34 new countries were created (two thirds of which as a result of the dissolution of the USSR and Yugoslavia). The last country formed before South Sudan was Kosovo in 2008, even though it is only recognised by 89 members of the UN.

New kid on the block

Nothing quite compares to South Sudan. South Sudan has everything a new kid on the block would like to have:

• It is big
If you exclude the former USSR countries, South Sudan is the largest country created in recent history by both population and land area. The size of the country is around 600,000km, or about the size of France, and has an estimated population of 10 million, roughly the same as Portugal.

• It is young
It is a new-born country with a very young population: almost 45% of the population is below 14 years of age while less than 3% are more than 65 years old, according to the CIA World Factbook.

• It is rich
South Sudan is immensely wealthy in natural resources including oil and gold. It also has very fertile land with the Nile river crossing the country and creating large irrigated areas. Careful exploration of these resources will significantly boost South Sudan’s GDP from its latest released GDP figure of $14.5 billion for 2010, according to SSNBS, 2010 report.

• It is beautiful
There is also huge potential for tourism. South Sudan is home to several national parks, such as Nimule and Boma, which host potentially more animals than the famous Serengeti in Kenya. Tourism counts as 25% of Kenya’s GDP and is its main source of foreign currency, which proves this industry is definitely something South Sudan can capitalise on.

Will the new kid behave?

Good behaviour for a new country (and for any country, for that matter) is predicated on five key pillars which are fundamental to a sound economic development:

1. Reliable institutions

Probably South Sudan’s biggest challenge is that the soundness of a country’s institutions plays a critical role in determining its competitiveness and growth potential. Investors can easily be deterred by lack of public and private sector transparency, over or under regulation, corruption and bureaucracy. The challenge for South Sudan is that several fundamental institutions have not yet been formed by the Government and as a result there is limited to no regulation across many industries (including the telecommunications sector). As a consequence, investors are offered limited protection and property rights.

The country is also conflicted between three legal frameworks: the national laws enacted by the Sudan Legislative Assembly in Khartoum, the laws of the “New Sudan” enacted by the Sudan People’s Liberation Movement before 2005, and the laws enacted by the Legislative Assembly of Southern Sudan since 2005.

Last but not least, the country is also known to have very high levels of corruption which potentially impact the distribution of wealth. If South Sudan does not proactively address these problems, investors will not feel sufficiently protected which will stifle all growth potential for the country. The new Government has the opportunity to now correct these issues to help build up the nation.

2. Ease of credit

Economies require an efficient financial sector, making capital available for investment. In order to facilitate access to financing, the government needs to establish credible credit bureaus and legal rights for borrowers and lenders. However, South Sudan’s financial system is severely underdeveloped as most of the previously existing financial institutions were Islamic and withdrew from the South.

Credit is scarce as a formal central bank and public credit registry are yet to be set up, and therefore there are limited structures in place to, for example, determine credit terms (lending rates, collateral requirements, etc.). Companies are rarely able to secure a loan, and when they do it is only on a short term basis (3-6 months) with extremely high interest spreads. As a result, many companies are forced to operate on a cash basis. South Sudan needs to urgently develop a functioning banking sector to support its growth ambitions.

3. Efficient infrastructure

When the peace agreement was signed in 2005, it is estimated that there were 4 kilometers (yes, 4 kilometers) of tarred roads. South Sudan lacks basic logistical infrastructure, following years of conflicts and limited investment in road infrastructure. This negatively impacts production capacity and affects the country’s ability to trade across borders, making transportation of goods timely and expensive. Since 2005, there have been improvements in transportation through road rehabilitation projects, but progress needs to be sped up as investment flows into the country.

4. Secure political climate

Naturally, investors are skeptical about investing in countries with political uncertainty. Unfortunately, South Sudan’s political climate is still less than stable. Tension remains between ethnic groups and political turmoil can still significantly derail local markets – recent (during the first half of 2012) events led to a shut down in oil production, sent local market prices soaring and the exchange rate differential between official and black markets jumped to unsustainable levels.

5. Quality of the workforce

Developed countries cultivate well-educated workers with quality higher education and on-the-job training, so that they can contribute to innovation and be drivers of change. One of the biggest difficulties South Sudan faces is that government authorities do not have sufficient trained staff to develop, implement and monitor regulations. At the same time, it is difficult to attract experienced foreign professionals to the country, given the political instability and general lack of development. If South Sudan works diligently on improving these 5 areas, it will certainly make for an appealing investment environment.

Trying too hard? The telecom market example

Cut to the telecommunications market. One could think that a new country, especially one with high growth potential (as discussed above) and very limited telecom infrastructure, would be a great investment environment for telecom operators. The reality in South Sudan is surprisingly different.

Yes, mobile penetration is only 20% and Internet and fixed penetration are negligible – compare this with North Sudan’s 67.5% mobile and 14% Internet penetration and you can see clear room for improvement. And with four active mobile players, you would expect mobile and internet penetration to quickly soar to peer levels.

Herein lies the fallacy. The reality is that the regulator has created a situation where competition is so fierce that, despite the low penetration levels, it has put South Sudan’s mobile rates among the lowest in the world. This, in turn, has shrunk operators’ margins to the edge of operational break-even, creating very little incentives for their shareholders to put additional money into a high risk, and potentially low return venture. The whole problem is further exacerbated when there are rumors that the regulator is looking to issue a 5th mobile operator license.

Why should they care?

It is proven that telecommunications are a catalyst of growth for developing economies. A recent study developed by Vodafone and Accenture estimates that agriculture sector revenues could be increased by 11% just by the adoption of few mobile enabled solutions (like access to financial services and access to the prices of the crops) besides other environmental benefits (like reduction of carbon dioxide emissions due to the need of less travel).

A developed telecommunications industry would allow citizens of South Sudan to leverage technology to enhance their quality of life and represent a leap in growth in society development and education. Access to financial services such as m-money (very popular in the neighboring country of Kenya through m-Pesa), Internet in schools and universities, government services through m-government (crucial for citizens in a country where travel is still a challenge due to the lack of proper infrastructure) are examples of the relevance of ICT.

Erase and rewind

What should the Ministry of Telecommunications of South Sudan do to ensure that the telecommunications sector (and ICT as whole) becomes one of the main drivers of the future growth of the country? The answer is not that easy. From the outside, things look always easier than they are; but having the challenge of driving the agenda of such a relevant industry for a country like South Sudan is huge.

As a guiding principle, the government needs to focus on how using telecommunications to enhance the country’s economy and on creating the right investment environment for telecom operators, rather than focusing on how the telecommunications sector can be a source of short-term revenue for the government.

The fundamental question is how many mobile players can a market such as South Sudan support in a way that makes it compelling for them to build telecoms infrastructure across a harsh, difficult to reach and less than safe geography? So far four seems not to be the right number. Five seems a step in the wrong direction. Opportunity to erase and rewind?

Another angle in which South Sudan could take advantage of the learnings from developed countries is the need to share infrastructure. Today, in developed markets, players and regulators are urging each other to share the infrastructure in order to be able to cope with the increasing capital expenditure needs required to cater the increase in data traffic etc. Creating an infrastructure player in the country responsible to, for instance, roll-out fibre for all players would help existing operators to gain a good return on investment.

A clear example of this pressure to obtain revenues from the telco players is what is happening in North Sudan. The North Sudanese government has increased the sales and services taxes for telecommunications companies to 30% from 20%, according to Bloomberg, putting operators’ ability to further invest at risk.

In summary, the telecommunications sector is no different than other sectors, and priority should be given to provide a stable regulatory framework that promotes healthy competition and further investment. As such, we believe short term wins could be:

• Develop and approve the telecommunications law that protects the interest the country and the players
• Create an independent regulator
• Regulate infrastructure sharing (allow and incentivise it)
• Promote the internet society development by creating a solid ICT plan including an e- and m-government roadmap

All key stakeholders, such as the government, regulator, operators, NGOs, IFC, and the World Bank are encouraged to take advantage of this opportunity and do it right. The long-term benefits of this approach will surpass in excess the short-term benefits of getting additional revenue from this sector.

 Josep Que is a partner at Delta Partners

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