Achieving Optimum Socio-economic Growth from Broadband Investment and Penetration in Africa: The Analysis of Economic Structure.

Achieving Optimum Socio-economic Growth from Broadband Investment and Penetration in Africa: The Analysis of Economic Structure Goodiel Moshi Graduate Student Graduate School of Asia Pacific Studies Waseda University, Japan gmoshi@fuji.waseda.jp Hitoshi Mitomo Professor Graduate School of Asia Pacific Studies Waseda University, Japan mitomo@waseda.jp In the course of three years from 2009, Sub-Saharan African region has witnessed tremendous increase in bandwidth capacity at almost 50 folds, and substantial decrease in broadband wholesale prices due to completion of multiple fibre optic cables. Also, governments have enacted policies to facilitate and participate in deployment national and regional fibre network, and strategies to stimulate demand. The economic growth and employment resulting from broadband investment and penetration has been used as justification for governments priority in promoting broadband. Since sub-saharan Africa is in very primary stages of economic development, which has fasten in the past decade, this paper uses growth identification and facilitation framework of dynamic comparative advantage to analyze and suggest policies that can take advantage of the recently available, robust and affordable bandwidth capacity, to maximize economic and social development. In particular, the study shows that most ICT policies so far have concentrated on infrastructure development while usage has been left aside, probably due to unavailability of infrastructure during the creation of the present policies. The study shows that enacting comprehensive policies that will focus in economic use of broadband, especially fostering new business that can take advantage of high-speed data is essential for development. Key words: Telecommunication, Infrastructure, Development, Policy 1

I: Introduction Over few past decades, the world has witnessed a tremendous advancement in science and technology, especially in the field of information and technologies; which has changed the way human being communicate, perform their duties as well as extension of boundaries that define an individual s or society s sphere of interaction. While IT has enables processing and storage of vast amount of information, telecommunication has allowed seamless exchange of information in real-time, and access of stored information within and across regional boundaries. The adoption and adaptation of these ICT s in societies has proved to significantly create new and expand traditional economic and social opportunities in societies; though challenges persists as well (Kozma, 2008). Indeed, the wide spread of ICTs to different societies over time has proved to be the fastest growing technology ever, that has been able to spread across societies, in the human history (ITU, 2009). The importance of investment in telecommunications infrastructure is now widely agreed among development and economics scholars to be an essential strategy to unlock national economies potential through employment, new businesses creation, smoothening international trade, as well as boosting social services such as health, education, and government services. Further, economies are likely to benefit from economic efficiencies gained from utilization of ICTs, all of these benefits sum into increased economic activities and enhanced social welfare of nations (Thompson et al., 2011) Although the extent of economic growth resulting from investment in infrastructure and the uptake of telecommunications services is still debatable, there is a general consensus on its positive casual effect in economic growth (Waverman, 2005). According to World Bank (2010), penetration of advanced telecommunication 2

services (internet and broadband) is expected to spur higher economic growth compared to basic voice telecom services Since 2009, Africa has witnessed completion of numerous inter- and intra- national fiber network projects that provide massive new data connectivity between Africa and the world, connecting from the South Africa, across other countries to major international fiber networks in Europe, Middle East and Asia. Prior to that, the region had to rely on unreliable satellite connectivity which was characterized by low capacity unable to meet demand, and restricting penetration of internet and broadband services to the masses. Together with that, there is ongoing deployment of 3G and 4G mobile networks to boost broadband penetration through wireless connection which is able to facilitate final data connection to mobile devices. Based on the success experienced in deployment of mobile voice telecommunication, there is great expectation of positive benefits that will result from the now available data networks and affordable data services. Research has shown service industries such as trade, banking and finance, health and education are likely to benefit more from broadband penetration; however, most African countries receive limited economic contribution in from such industries since their economies are heavily dependent of primary commodities; with high percentage of informal economy. To reap the benefits of broadband connectivity, countries need to design policies that encourage the integration of broadband in their economic initiatives and activities in a way that provides merit broader economic benefit to the economy. This study attempts to answer the question; given their economic structure, how can developing 3

countries utilize broadband penetration to effectively spur economic growth. The analysis focuses on the role of broadband in current economic structure, in terms of the extent of its contribution to different general sectors of the economy and aggregate economy. In addition to that, some African countries have been growing their economic activities at 5 percent and greater. In such environment, there can be change of economic structure where some sectors increase their share in the economy and vice versa. The study will concentrate on how broadband penetration facilitates growth in traditional and newly emerging industries/sectors; which results to broader economic growth. From here the paper is arranged as follow: investment in data networks in the region is explained in second section; third section explores utilization of broadband and economic development; growth identification and facilitation framework and analysis on policies for encouraging new industries that utilizes high-speed infrastructure is covered in section four, and finally section five provides discussion and concluding thoughts. II. Investment in data networks and penetration of broadband in sub-saharan Africa The availability of broadband infrastructure plays the most fundamental role in the race towards the subscription and the use of broadband services. While African region has made progress in terms of penetration of basic telecommunication services, the regions still lags behind in broadband access infrastructure and usage of internet and broadband services. For example, in 2009, although the region consists of 15 percent of the global population, it accounted for only 0.2 percentage of international internet bandwidth, and only 9.6 percent of the population used internet in 2010, 4

most of them in North African countries and South Africa. Countries International % of the Internet users 2010 bandwidth 2009 world 2009 Africa 38,535.0 0.2% 9.6% Americas 4,889,491.0 20.7% 55.0% Arab states 324,575.3 1.4% 24.9% Asia - Pasic 2,504,479.1 10.6% 21.9% Europe 15,676,560.0 66.4% 65.0% CIS 176,167.0 0.7% 46.0% Adopted from ITU, 2010 Poor penetration of broadband in the region can mainly be attributed to lack of access infrastructure, following monopolistic and inadequate investment in international data networks and other routing facilities such as IP exchange servers (IPX); hence internet connectivity and broadband remain to be lagging behind other regions in the world (Gillwald, 2011). As shown in the figure bellow, international connectivity which is predominantly done though undersea fibre optic cable between continents is essentially important for reliable and fast access of data connectivity across borders. Adopted from William (2010) 5

Prior to 2009 most of the international data networks were predominantly owned by few incumbents with no competition; satellite technology was the primary technology, with only one undersea cable running from South Africa through the west coast, connecting through West Africa to Europe. As a result, ICT access between Africa and the rest of the world were the highest compared with other parts of the world, and the region experience low level of data traffic. In 2005, the international wholesale bandwidth prices were 20 to 40 times more expensive in sub-saharan Africa region compared to prices in United States, resulting to prohibitively high prices at low and unreliable data connectivity. Development of undersea fibre cables and national backbone infrastructure In the late end of last decade (2 001 2010), the continent has been able to attract investments in undersea fibre cables to boost international data connectivity. Before the SEACOM become operational in 2009, the region had only 340 Gbps through SAT/3 and satellite communication. The growth of investment in undersea fibre cables has increased international internet bandwidth capacity of the region almost 50 folds in the course of three years (2008 2011), reaching 17 Tbps as fibre cable projects become active. 6

Source: Compiled by author from www.manypossibilitis.net The table bellow shows details of different projects in the region that connects to major international data cables in Europe, Asia and Americas. Submarine cables connecting to Sub Saharan Africa, 2011 System Distance Capacity Status (km) SAT-2 9,500 560 Mbps Operational Atlantis-2 8,500 10 Gbps Operational SAFE 13,800 130 Gbps Operational SAT-3/W 14,350 120 Gbps Operational ASC SAS-1 333 1.28 Tbps Operational FLAG 10,300 2.56 Tbps Operational FALCON EASSy 9,900 1.4 Tbps Operational EIG 15,000 3.84 Tbps Operational SEACOM 13,000 1.28 Tbps Operational TEAMS 4900 320 Gbps Operational LION 1,800 1.3 Tbps Operational Cable LION 2 3000 1.3 Tbps Under construction Cable 7

GLO-1 9,330 2.5 Tbps Operational MAIN-1 6,900 1.92 Tbps Operational WACS 14,000 3.84 Tbps Under construction ACE 14,000 1.92 Tbps Under construction ASex 9,000 12.8Tbs Under construction Adapted from Himilton (2010) and www.manyposibilities.net (2011) As a consequence of increased capacity and competition in submarine fibre cables, there has been pressure to lower both wholesale and retail prices in local markets, which have made data packages more affordable to business and individuals (Gillwald, 2011Frost and Sullivan, 2010). In some countries where they have more than one landing of data cable, competition has enabled prices lower compared to countries with a single sub marine cable landing (ITU, 2010). For example, in Kenya with connection to three international sub marine cables - TEAMS, EASSy and SEACOM, whole broadband prices have been reduced from an average of USD 5000 per 1Mbps per month to 600 per 1 Mbps per month in 2011. Further competition in the international connectivity and increasing bandwidth capacity will warrant data consumers connect to broadband at cheaper prices closer to their counterparts in other regions in the world; and reliable connectivity with redundancy capability due to availability of multiple routes. However, other factors such as development of local fixed and mobile data networks are likely to affect the uptake of broadband service; and policies are needed to ensure development efficient use of international bandwidth available. III: Utilization of Broadband Networks and Economic Development Sub Sahara Economic development in the decade Based on IMF data, in the past decade (2000 2010); five countries in Africa: Angola, 8

Nigeria, Ethiopia, Chad, Mozambique and Rwanda were among top ten of world fastest-growing economies1 in the world posting on average annual GDP growth above 7.4 percent (The Economist). In broader terms, sub-saharan Africa s real GDP grew at an annual average rate of 5.7 %, making it the second growing region behind emerging Asia. During the same decade, telecommunication industry grew remarkably as private investments flow in the continent increased in multiples as a result of policy changes that enhanced open market environment including liberalization of market, privatization of incumbent operators and establishment of independent operators across the continent. Telecommunication industry in sub-saharan Africa region grew as one of the main sources of income to governments revenues, posting greater share in the nations GDP. For example, in Nigeria, private investments stock in telecommunication industry has grown from just USD 150 million in 2000 to USD 18 billion in 2009; subsequently, mobile penetration increased from 0.73 percent to 53.23 percent in the same period, and in spite of the country s heavy dependence oil industry, telecommunications revenue share to nations GDP has increased from 0.62 percent to 3.66 percent from 2001 to 2009. 1 excluding countries with less than 10 million population and Iraq and Afghanistan 9

Source: ITU database There exists a wide pool of studies accessing the impact of investments and penetration of telecommunications in communities, mainly due to gradual emerging of new infrastructure technologies and the increase of ICT applications that are assumed to provide greater economic value and consumers welfare in societies. As telecommunication infrastructure requires huge investments, it has been a major concern for scholars and policy makers alike to assess whether these investments can be justified against aggregate economic key performance indicator economic growth, employment and productivity (Ciriani et. al., 2009; Katz, 2010). Further, most studies have attempted to understand factors determining penetration of these technologies to the populations and businesses which is vital for maximizing direct and indirect benefits in the society as whole. Broadband as a strategy for economic growth, development and employment A detailed theoretical account that shows the social economic impact of broadband in an economy was adopted from Katz (2010) study. According to this study, major economic benefits of deployment and use of broadband comes from investment in 10

infrastructure as broadband infrastructure constructors and supplier firms that gain from engaging in such activities. Direct effects results from efficiencies gained when business and households utilize broadband as a platform for existing and new services hence positively contribute to GDP and employment. For policy makers in the region, telecommunication industry plays a significant role in its development agenda. As indicated above, telecommunication industry has emerged to be a significant industry in the region s economy. According to World Bank, in low and middle income economies, penetration of additional 10% in telecommunication services spurs economic GDP growth between 0.73 and 1.38. Further, penetration of advanced services (i.e. internet and broadband) is expected to result into higher economic growth that penetration of basic services (fixed and mobile telecommunications). By analyzing data, it can be clearly seen that telecommunication industry in the past 11

decade has increased its share in the nations total GDP for all countries analysed in this study. The increasing international bandwidth that is now available in the region offers opportunities for African countries to achieve higher economic impact from the telecommunication infrastructure. Broadband offers a variety of economic growth opportunities different from those offered under basic telecommunication. Empirical studies have substantiate that broadband is likely to spur economic activities through investments, transaction cost saving, education and job training, as well as increasing net employment (Thompson et al., 2011); policies and initiative enacted by each economy are likely to determine the outcomes accordingly (Koutrompis, 2009). As said earlier, broadband penetration in sub-saharan African has been very low, lagging behind other parts of the world. The recent developments in undersea cables have rapidly increased the capacity for international data connectivity to almost 50 folds in the past three years, and it is about to double its current status by 2013 as more undersea cables become active. Together with the deployment of wireless data technologies, broadband uptake to households is likely to continue. The available infrastructure is expected to provide new opportunities to sub-saharan Africa region; however, knowing the current situation in the continent with the insight of the literature and the framework given earlier is necessary in order to conceptualize the options and set out strategies needed to maximize benefits from the recent broadband investments. The challenge of Broadband for development in Sub Saharan Africa Despite enormous evidences in rising of new services such as mobile payment and mobile banking, and retailing of ICT goods such as mobile phones, accessories and 12

airtime; the analysis of macroeconomic impact of telecommunications sector on the economy was mainly generated through sector growth rather the use of telecommunication services which is contrary to the developed countries (UNCTAD, 2007). This idea stipulates that, while ICTs adoption especially of mobile phone might have significant effect in minimizing transaction costs, market access and emerging of small businesses such as air-time selling shops; these benefits are outweighed by sector growth of new users and revenues from introduction of new services. This tendency might be common for developing markets where potential markets have not been taped and available services in the market are very basic, unable to support advance uses of ICTs. More government have been committed to create policies and strategies to boost broadband infrastructure, creating demand for broadband services and promoting penetration to potential residential users. As far as residential penetration is concerned, while there are general benefits for broadband subscription by individuals, broadband uptake has not been as fast as it was expected to be. In most developed countries, which are endowed with highly educated population compared to developing countries, still broadband uptake has been slow and there is still a gap between available infrastructure and actual subscriptions (Katz, 2011). Further, broadband utilization tends to grow with education level in the population able to utilize broadband applications, and availability of application relevant to social and economic problems in the region (Kim, Kelly and Raja, 2010). On the other hand, the general discussion on boosting penetration of broadband has concentrated on residential users in African countries, except for few countries; 13

policies have been quite about targeting business users. Contrary to broadband penetration to residential users, the use and benefits of broadband communication can easily be analysed to determine the economic benefits of broadband between broadband adopters and non-adopters. A study by European Commission shows service industries are heavy used of ICTs than manufacturing sector. Business that use broadband are likely to benefit from efficiencies gained in capital and labour productivity through various activities such as lowering transaction costs, better management of their business supply chain and access to greater market through online activities such as online marketing and advertising. According to Fornefeld et al. (2010), labour productivity gains from broadband adoption in service sector averages 10 percent, while in manufacturing sector it is 5 percent growth. On the on the other hand, presence of reliable and affordable broadband, especially allows creation of new industries in service industry that are based on high skilled labour. Broadband access allows experts on service sectors to provide their services beyond their physical reach through application on the broadband infrastructure. The growth of Knowledge-Intensive Business Service industries span across a various level of knowledge intensity and expertise required, as well as services within national boarders and international transactions. While the existence of these services have been there for a while in developed countries, even before widespread of broadband, there services have emerged recently in developing countries mainly due to presence of telecommunication infrastructure that allow clients in developed world to access services from comparatively attractive labour cost in developing world. For example, the rising of Business Processing Outsourcing and IT Enabled Services 14

(PBO/ITES) is an example of Knowledge-Intensive Business Service that is entirely facilitated on the broadband infrastructure. BPO/ITES sector especially in industry sectors such as India and Philippines have become not only source of economic growth, but also provide employment opportunities to local SMEs, large business firms engaged in exporting such knowledge services. The rationale for development of supported by the following reasons: Increases demand and economic use of the available international bandwidth capacity In contrast to penetration to the residential uptake of broadband, BPO/ITES sector responds attentively government initiatives, and its contribution to the economy is likely to be more effective, at least in short run. Note that, eco system that includes residential penetration has more stakeholders, with diverse characteristics making it hard for Unlock employment opportunities for underemployed labour in developing countries by including them in global value creation hence increase global productivity for their clients Economic development to developing countries that results from foreign investments, technology transfer and creation of new businesses. Finally, BPO/ITES sector consists of a wide range of services from those which requires comparatively low human capital such as data entry and call centre, to those which benefits on highly skilled human capital such as market research and analysis. Hence, African countries can began with basic BPO/ITES and develop the industry to more advanced services, while taking advantage of low labour cost. The figure below depicts the range of tradable services in ITES/BPO sector, 15

with different levels of labour skills. Adapted from KPMG (2010) IV: Growth Identification and Facilitation: Case of Business Processing Outsourcing and IT Enabled services. The access to broadband infrastructures renders a new set of opportunities especially in service sector which goes contrary to or complements the traditional economic development theory through industrialization. While traditional path of economic development in developed countries went from large share of agriculture sector, followed by increase in industry sector and finally dominated by service sector which is more linked to high quality and abundance of human capital, developing countries in the past decade have shown divergent path as they have increased their share of service sector ( Goswami, Matoo and Saez, 2012). It s important to note that, since 16

services sector covers a wide spectrum of economic activities, some countries might experience increasing share of services sector that constitute of low value addition such as increase in local trade(leke, A., Lund, S., Roxborgh, C. and Wamelen, A., 2010). As focus of this study, those countries that have significantly utilized telecommunication infrastructure to build on service sector are taken to lay a groundwork for this analysis.; Looking to the fundamentals for economic growth relevant to utilization of broadband resources for development, country s factor endowment (especially human capital) infrastructure principally telecommunication networks, and the quality of institutional framework play a significant role in harnessing benefits from broadband. Growth Identification and Facilitation (hereafter GIF), provide an economic model different from the traditional model on comparative advantages, by suggesting policies that are likely to support growth on new industries especially for developing countries. According to Monga (2011), with more focus on government policies to development, he stipulates that countries can grow by promoting new industries through the process of dynamic competitive advantage by first, identify industries which the country have potential comparative advantage; second, eradicate obstacles that are likely to hinder the emergence of such industries and third, create conditions that allow them to become the country s actual competitive advantage. Monga (2011) stipulates GIF six-step process that can be followed by developing countries: Identification of tradable goods and services produced in dynamically growing countries in about 20 years with similar endowment structure and income per 17

capita that is about 100% of their own. On the list, government may give targeted policy that increase private participation and give them an opportunity to grow Since these industries are usually new, government can create an environment that allows foreign investors from advanced countries to invest in these industries hand-in-hand with domestic firms through programmes such as incubation programmes. Government and other institutions should monitor the development of these industries to promote best practices, learning, products improvement and support scale up process. In regard to poor infrastructure in developing countries, government can build and/or allow private sector to own industrial parks and export processing zones that are equipped with necessary facilities to attract investment of foreign firms, forge competitiveness and reduce barriers entry barriers to local firms Limited to time and size, government can give incentive such as tax breaks as an incentive for private firms that take risks in early development of these industries. In fact, government focus on broadband use for business purposes, especially creation of new business such as BPO/ITES is essential for economic development. The newness of high speed data communication infrastructure at increasing affordable prices, and its potential for emerges of BPO/ITES industry in other developing countries (in particular India and Philippines) qualifies the industry for GIF. Bellow, the government policies in four countries countries are analyzed to determine their experiences in promoting creation of IT consuming industries, with emphasis on BPO/ITES. Countries analysed include Mauritius, Senegal and Ghana, only countries 18

from Sub-Saharan African region that appeared in A. T Kearney Global Service Location Index (2009) indicating major destination in Goble BPO/ITES services. Kenya is also included due to its current initiatives in fostering business use of broadband infrastructure. The instruments proposed in the GIF framework that are necessary for nurturing new BPO/ITES industry with reference from other developing countries are coined. Country Current situation Government policy Institutions Enabling Mauritius environment 26 th in A.T Kearney Finalizing MITIA, an State Global Service formulation of IT industry and private Location Index,2009 National association that More than companies Broadband Policy forges business owned ICT packs concentrated on call PBO/ITES alliances and Refund centre and PBO integrated in ICT lobbies for policy of up to 75 Contributes 6.5% to policy issues percent of training GDP (2011) Data protection costs law (2004) Corporate tax Ghana 15 th in A.T Kearney Global Service Location Index,2009 2 nd highest employer for youth in the country Although its small in size, it s the fast growing industry. exemption Specific PBO/ITES policy In progress of creating national broadband policy Tax break for new investing companies Senegal 26 th in A.T Data protection Kearney Global law (2008) Service Location General ICT Index,2009 policy however 2 nd highest give emphasis on employing sector in BPO/ITES the country 19 GASSCOM, an industry association in collaboration with Ministry of ICT Ministry of Education with GASSCOM developed curriculum for BPO/ITES services Skills training matching programme of USD 3 Mil Existence of general SME supporting institutions ICT parks and incubation programmes for SMEs ITES Matching grant for SMEs ICT parks and incubation programmes for SMEs

Concentration in French Call centres Kenya Emerging as the leader in East Africa region About 50 companies (2009) Concentration in call centres Currently, Kenya ICT Tax no broadband body provides incentive in national policy, but government special economic National ICT policy assistance to the zones open to has the ICT vision industry various industries 2030 BPO academy including IT Identifies established for enabled services. PBO/ITES industry human resource is stressed in development general policy Provides off policy strategies through Prime Minister special team Data protection law (2009) V: Discussion and Conclusion By analysing the policies and strategies of regional leading countries in creating BPO/ITES industry as one of new industries that benefits from the increasing high-speed data infrastructure in the continent; several features can be seen: First, although other countries have National ICT policy, only Ghana has policy targeted to business use of broadband infrastructure through BPO/ITES industry. However, other countries such as Mauritius have been able to develop PBO/ITES through collaboration of different stakeholders; through government coordination of initiatives. Second, few countries have the legal framework conducive for contracting international clients that require offshore services. For example, since BPO/ITES and other services enabled by broadband infrastructure deal with data and information sensitive to clients, privacy and data protection law is for creating enabling environment for broadband utilizing service businesses. For examples, with 20

exception of Mauritius which enacted Data protection law in 2003, all other countries in the analysis enacted that law in recent years Senegal and Kenya 2008, 2009; while the law is yet enacted in Ghana, though it has already been prepared. Third, only Ghana has national policy dedicated to BPO/ITES industry. In case of Kenya, where there are multiple organization working for different segments in the BPO/ITES industry, creation of a comprehensive policy plan for BPO/ITES would provide a direct mechanism towards industry development and eliminate redundancy in the functioning of stakeholders. Forth, since skills development is critical especially for the service industry in developing market to attract foreign companies, unavailability of skills tends to impede sector development. Ghana s Ministry of Education and the industry association have created curriculum, and developed the benchmark for developing competitive human resource. In Mauritius, government has offers 75 percent of training expenses, hence tackling the human resources challenge. According to A.T Kearney Global Services Location Index (2011), only four countries Mauritius, Ghana, Senegal and South Africa were ranked in the first 50 destination. The ongoing completion undersea fibre projects has resulted to increasing international bandwidth capacity and lower prices, which used to hinder Africa competitiveness in the ITES market. As governments devote to boost demand for broadband usage, we urge that business uses of broadband especially creation of new industries has been left behind in most countries. Further, though residential penetration is still very important in order to achieve broader benefits of broadband services, business uses in particular new BPO/ITES is more likely to bring relatively faster contribution of broadband to national GDP, as well as increasing employment 21

since the businesses tend respond rather fast to policy incentives, and the stakeholders in ITES business sector ecosystem is less complex. Due to the fact that international connectivity has just been available at business viable quantities, quality and prices; according to Growth Identification and Facilitation framework, it is important for government to take charge in organizing and facilitating conducive environment to allow emerging industries that commercially utilize the available telecommunication infrastructure for economic growth and development. 22

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