How the digital divide in SA can be bridged with pay-as-you-go fibre – Cobus Venter
Numerous studies highlight the pivotal role of fibre broadband connections in fostering economic growth in emerging markets. In South Africa, the rollout of fibre has worked well in leafy middle-class suburbs but for 60% of the population that is not a reality. Two companies leading the charge in bringing fibre internet to townships are FiberTime, recently infused with an R39.9 million investment from Finnish development financier Finnfund, and VulaCoin, who is offering digital wallets for micropayments. Providing connectivity at half the price with uncapped internet and speeds up to 100Mbps, their inaugural fibre-to-home project launched in Kayamandi Township near Stellenbosch last year. In an interview with BizNews, Cobus Venter from the University of Stellenbosch's Bureau for Economic Research who is a consultant for VulaCoin and Fibertime said their model could be rolled out by larger fibre networks, enabling townships to leapfrog straight into the modern digital era. Venter cites a call centre worker's savings of R900 a month in travel expenses and an extra four hours a day with her children as a compelling example of the social development impact. South Africa, he says, is slowly but surely shifting to pay-as-you-go for many other services as well. – Linda van Tilburg
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Relevant timestamps from the interview
- 00:08 – Introductions
- 00:35 – Cobus Venter on the concept of Pay as you go
- 02:25 – Where is this being rolled out
- 03:44 – On the threats of theft of cables
- 05:40 – What are the key factors to replicate this project
- 07:29 – What is the cost benefit to consumers
- 13:08 – How are Businesses feeling about it
- 14:56 – What other sectors might be able to replicate this pay as you go service
- 16:55 – Could this kickstart the informal economy
- 18:59 – How does this model align with the government's digital inclusion
- 20:27 – What are the obstacles
- 22:53 – Conclusions
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Edited Excerpts from the Interview
Modern fintech is leveraged to find a solution for connectivity issues in townships
This solution leverages modern fintech to address an old issue: financing large infrastructure projects for fibre rollout in townships. Traditional methods like pre-sales and monthly debit orders aren't feasible here. Instead, we've developed a solution that caters to every user. It operates on a pay-as-you-go model, where the operating system is validated using the same technology as the payment, which also activates the device. This process is seamless and automatic, creating a consumer base within the township.
We had to demonstrate to the financial sector and banks that this approach, without any pre-sales agreements, would generate sufficient income to be viable. This idea has been in the works for a few years, but it's only now that technology has caught up to make it possible. While our solution is currently the largest of its kind, we hope others will follow suit and replicate our model to connect more people. The goal is to expand connectivity, and we believe this approach is a significant step in that direction.
Successful roll-out in Kayamandi, enquiries from Zambia, Ghana, Côte d'Ivoire
Our proof of concept, or FiberTime's proof of concept, began in Kayamandi, just outside of Stellenbosch, due to its proximity to our offices. It has since been implemented in four other townships. VulaCoin, the operating system and payment gateway, enables a pure pay-as-you-go model.
The fibre is already operational on several dozen other ISPs, most of them in the proof-of-concept phase and limited. The largest user base is in the Western Cape, but it's being tested all over the country. We've received inquiries from Zambia, Ghana, and Cote d'Ivoire, but we're currently focusing on South Africa due to capacity constraints. In the next year, we hope it will be rolled out on several larger networks, enabling people to leapfrog straight into the modern digital era.
As for the concern about theft, fibre cables are not as susceptible as copper cables. The real challenge is shifting from a formal economic mindset. We've learned a lot from the community to ensure buy-in. The fibre lines themselves have no value, but the routers in each dwelling do. Each dwelling, whether a brick-and-mortar house or a shack with a legal electricity connection, gets a router with an embedded UPS device.
Hoping that the large fibre operators will replicate the model
There's very little stopping it from being rolled out in other places. The biggest challenge was getting banks to finance the rollout of fibre, whether it's trenched or aerial. In township environments, we have to use aerial fibre due to space constraints and high densities. We follow similar paths to where the overhead electricity comes from, planting our own poles and dropping physical fibre lines into each house. This gets quite dense and is very expensive.
Initially, the challenge was gaining community acceptance and securing bank funding.
Typically, in suburban areas, a pre-sales agreement, and a threshold of 30 to 40 or 50% are required before banks extend credit for local construction crews to trench and connect. However, we spend all that capital upfront with absolutely no guarantee of usage. Our operating model was sustainable at around 60% network utilisation on any given day, at a price point of around R5 a day.
We've never hit less than 84% utilisation on any given day, at a price point significantly higher than R5, simply because more people are connecting than we had anticipated. Now, financial institutions can verify this. We're very open with what we've done. As one company, we can only connect so many houses in a year, and we're hoping that some of the larger fibre operators will eventually replicate what we're doing.
Halving the cost of data for consumers
When we conducted a pre-survey in our target community to assess available funds, we found that most of our consumers spend around R200 a month on mobile and connectivity data costs. This amount typically buys a few gigabytes of data.
Our service costs as little as R100 a month for 400 megabytes up and down, with a minimum speed of 100 megabits per second. It's high-quality, uncapped internet. The average consumption is now around one and a half terabytes of data per user. So, for half the cost (R100 versus R200), instead of consuming five gigabytes, you're consuming 1,500 gigabytes. The value proposition to the consumer is incomparable.
This is real, generational wealth creation, as the consumer surplus has been dramatically enlarged in economic terms. The real test will be how this is utilised. A lot of it will probably be used for pure entertainment purposes, such as watching Showmax or Netflix or engaging in social media. But at the same time, people will access education and better early childhood development aids, things that people like us take for granted. Now, these resources become available, and you can watch a video without worrying about using up your data too quickly.
We are studying this phenomenon. We started with a pre-survey, and have conducted a midpoint survey, and the Bureau will do an endpoint survey at the end of this.
Mapping how real broadband penetration alters lives; it's a game-changer
We're in a unique position to map exactly how real broadband penetration alters lives. We decided to focus on friction costs, such as job search cost and duration, because these can be measured within a year or a year and a half. However, the longer-term dynamic benefits in terms of better social outcomes are harder to quantify.
For instance, one of our first users, who worked for a call centre in Cape Town, used to spend two hours each way commuting, costing her R900 a month. Now, her employer is comfortable enough with the quality of her connection that she's allowed to work from home. So, she saves R800 a month (assuming R100 is spent on connectivity costs) and spends an extra four hours a day with her children.
From a social development perspective, the impact of this change is hard to quantify. We'll only see the effects 20 to 30 years down the line when her children grow up. Will they be better educated? Will they be less prone to the typical social problems we have in South Africa?
The real value here is that we're addressing a massive problem in South Africa: the exclusion of the vast majority of our people living in the informal economy. Spatial apartheid created a situation where the formal and informal economies struggle to overlap due to past spatial planning. The digital economy doesn't require physical space and is growing exponentially, allowing people to leapfrog traditional South African constraints.
We're confident this will create a positive feedback cycle in South Africa, as long as the funding part comes into place. We believe we've solved that, and we're open to anyone willing to look. Banks are buying into it, and FibreTime recently had a European Development Finance Institution (DFI), FinnFund, make a direct investment into their group because they saw the potential benefits. This is a game changer that's growing exponentially.
South Africa is slowly but surely shifting to pay-as-you-go for many services
Well, essentially any service industry is slowly but surely shifting to pay-as-you go. The traditional mobile operators in South Africa, when they started in the 90s, had a prepaid business model and they went off to the corporate clients. So a corporation signed up, gave their staff mobile phones and they got paid every month on a direct debit. It's a lovely moat when you can have it because it protects the company. The reality is as the market matured, more and more people on the networks decided to go more pay-as-you-go. In most cases, I don't know what the current numbers are, but the vast majority of consumers now use pay-as-you-go mobile phone services. This is the same principle, but that holds for pay-TV. This holds true for insurance.
With local football clubs, you don't take out life insurance for your players on a constant basis because it's too expensive. But when you are travelling by taxi to East London for a league game for a weekend, the risk becomes a lot greater. Maybe then you take out a policy just for the weekend. So these are ways that are changing, you know, kind of the fundamentals of how we operate.
Capitec was the first one to start doing that in the banking sector in South Africa. Instead of monthly bank fees, you have a usage fee. It's kind of the same principle.
The fibre model is an enabling factor for pay-as-you-go in other sectors
The pay-as-you-go service model allows us to create the base. So, you're creating an environment of people that can actually partake in the digital economy. So after that, it's an enabling factor and then whatever gets built on the digital economy can also be utilised. VulaCoin can instantly validate and settle any transactions that happen in this case, as some other digital wallets can do the same kind of thing. So essentially it's everything that is digitally available.
From a government point of view, for example, this includes identity documents. It includes making appointments for your Grade One to go to school, etc. It creates a massively improved efficiency gain for the economy because in many cases, you know, you can still go to the primary school and hand in your form, but now you have to have it printed at PostNet as an example, or whoever at your work you have it printed. You have to fill it in, you take it there, somebody has to scan it, send it off.
Now you can do this all online, get submitted centrally, and it happens in real-time. So it's not just the pay-as-you-go, fibre business model, it's what it enables and that's the dynamic effect. So it's like a positive feedback loop that gets created by having it in the first place. It's like having a foundation for a building, what gets built afterwards comes up for discussion, but you need to have the foundations and they need to be firm enough. To date, 60% of our population is not going to get that anytime soon.
How access to fibre can kickstart the informal economy in South Africa
I'm absolutely convinced of it. Firstly, there's the investment aspect of it. You're not able to invest in areas that were previously uninvestable. So there used to be a lot of negativity and negative press around redlining of informal economy areas and things like that. And I always found that to be quite unjust towards the banking sector. It almost felt as if they did it on purpose, whereas in reality, they didn't know how to measure their risk, and they didn't know what to price their capital on.
What this is showing them is that there is a way to measure it completely and there is a way to extract the needed revenue to pay for the investment, you know, it's not a charitable event and that was one of the other reasons that everything we're doing and that I've been fortunate enough to be a part of is done with an explicit aim of making it financially sustainable and self-sufficient.
So the original idea from the chairman of FiberTime, Alan Knott- Craig Jr, started in Tshwane with Project Isizwe, which was free Wi-Fi for Africa. It started in the Tshwane Metropole and it was paid for by the municipality. That became a political hot potato at some stage.I am unsure if if the original Project Isizwe network is still operating in Tshwane but they have also adopted VulaCoin to grow and run their networks sustainably. So it's a decade plus success story.
When the free market applies its mind and can validate and price for an investment, the investment can follow because it's an informed decision. It was unreasonable to think the banks must invest money if they didn't know how they would realise a return.
Obstacles to rolling out fibre for everybody in South Africa, community buy-in
The biggest challenge will be financing, getting companies that are entrenched in the fibre business already that have the skills to actually rejig the networks more towards a pay-as-you-go system than a prepaid or postpaid system. It does imply some short-term risk because you're essentially potentially on their networks, they can charge more for a short-term pay-as-you-go solution, but you used to have the security of a monthly direct debit. There is that transitioning risk. The reality is it's coming anyway. The sooner they pivot towards that, the better. That's probably the single biggest structural risk.
The other real one is that you need municipal permission to plant poles and string fibre. You need that process. So far, we've been very fortunate to have very understanding local authorities that we've dealt with. We're heading into four new areas as we speak, not just Western Cape-based. We're doing a large township outside of Gqebera in January, and it's the same reception. So you do have those issues.
The bank so far, we had a long process until we got a TPPP, a third-party payment provider, status through a local bank, issuing bank, very happy to, not sure if I should name names, but they know who they are, we're very grateful for them. And it was difficult to start, but now that it's working, it's very easy to show everybody how it works.
Then, of course, the main thing is community buy-in. The community must want you there because otherwise, they'll never allow the construction. Remember in a township environment where you've got this incredible density, if the people don't want you there, they're not going to let you in, which means your whole project stops before it even starts. As I said, so far, our kind of experience with that has been life-affirming if I can put it like that.
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