Broadband Infraco: Annual Report 2008/09 briefing

Meeting report

Broadband Infraco (Infraco): Annual Report 2008/09 briefing
The Chairperson noted that the delegation from the Department of Public Enterprises (DPE) had not yet arrived by the time the meeting was scheduled to start. She noted that problems were caused by delegations only flying in to Cape Town on the morning of the meeting. Another problem was that generally the Board of a State Owned Enterprise (SOE) did not appear before the Committee, but Parliament had questioned this. This would be the first interaction between the Committee and Broadband Infraco, which was still in an embryonic stage.

Mr Andrew Mthembu, Chairman, Broadband Infraco, noted that only the 2008/09 Annual Report was being tabled, and this was the second Annual Report (AR) compiled by Broadband Infraco (Infraco). Infraco had been formed in December 2007 and had thus only been in existence for eighteen months. 

He gave a brief background and perspective. The Department of Public Enterprises (DPE or the Department) had conducted a study into the broadband perspective in 2004, and an international survey on bandwidth availability.  The driver for the study was the belief that many industries would be more successful if it were not for the high cost of bandwidth.  The Department felt that Eskom and Transnet possessed certain assets such as its power line system.  These assets should be made available to the proposed second telecommunications national operator.  It was evident that if these assets were passed on to the second national operator (SNO) it would lead to the creation of a duopoly with Telkom.  Such arrangements never led to reductions in costs as there was an inevitable element of collusion.  The DPE had therefore decided it would be best to transfer the assets to a new SOE.

He said that South Africa was lagging in terms of integrated communications and technology (ICT) penetration.  Broadband connectivity was low and expensive.  Telkom was the main service provider (SP).  The majority of costs were associated with national long distance lines (40%) and international lines (also 40%).  The DPE felt that there was a need for intervention in these spheres.  In 2009 an International Telecommunications Union (ITU) report revealed that these conditions still prevailed.  Cabinet had thus resolved to retain ownership of broadband assets.  Broadband Infraco had been established in 2007 with the responsibility of realising these assets.

The Chairman said that there were two key elements to Infraco.  The first was the creation of a national long distance network using fibre-optic cables.  The second was an international connectivity project.  To this end Infraco had entered into an agreement with thirteen other parties to establish a sub-marine cable with a capacity of 3.8 Terabits between Cape Town and the United Kingdom.  This cable, which would stretch for 13 000 kilometres, would be in service during 2011.

He said that the Broadband Infraco Act (BIA) of 2007 had established the company as an SOE.  It was charged with creating a long distance structure, which would lead to increased access to broadband facilities.  The focus was on improving access and making broadband affordable in a non-discriminatory manner.  Infraco would ensure the achievement of this goal through a framework of good corporate governance.  Profit margins would be kept to socialistic levels.  The aim was to be self-sustaining in the short to medium term.  Infraco might have to rely on the fiscus for assistance in the next couple of years, but would keep its requests as low as possible.

Discussion
The Chairperson asked who would be laying the cable.

Mr Mthembu replied that there were fourteen parties in the consortium.  A French SP had been appointed, which would manufacture and lay the cable.  The consortium was already surveying the route on which the cable would be laid. Manufacture of the cable would start in December at the factory in Calais.  The French company had its own ships to do the work.  There would be fourteen landing points along the African west coast.

Dr G Koornhof (ANC) asked when the Act of 2007 had come into operation.

Mr Mthembu replied that it had been effective as from 1 February 2008.

Dr Koornhof said that eighteen months had passed.  He asked if Infraco was satisfied that it was on track.  He asked if there were any weaknesses in the legislation that were likely to require amendments to the Act.

Mr Mthembu believed that Infraco was on track regarding its mandate.  In terms of legislation and regulations Infraco were on track.  However, the delay that Infraco faced was due to licensing.  Its application for a licence had been very delayed.  Infraco had only received a policy directive in February 2009.  The licensing process had started in March 2009 and was still not complete.  He hoped that it would be granted by the end of September 2009.

Mr P van Dalen (DA) noted that the cable was to be laid on the west coast.  There was also a cable project on the east coast.  He asked why Infraco was not a partner in this project.

Ms F Hajaig (ANC) noted that only one organisation was working with Infraco at present.  She asked what was happening with other SPs, such as Telkom.

Mr S van Dyk (DA) noted that Infraco had four objectives.  He did not see any time frames attached to these objectives.  The Committee would be able to exercise better oversight if Members could hold Infraco to account against a set time frame.

Ms Mentor asked if South Africa held the intellectual property (IP) rights to the submarine cable despite the involvement of other parties.

Mr Mthembu replied that the cable on the eastern seaboard was called SEACOM.  Private equity players had funded this.  They had a simple mandate, which was to ensure a return on the investment made.  He could not see the implementation of SEACOM pushing the price of connectivity down.  The managers of SEACOM had no wish to engage with government agencies or SOEs.  Infraco were purely motivated by profit.  The success of an international connection was dependent on its capacity, cost and ability to provide redundancy.  It would collect traffic from the mainland.  The West African Cable System (WACS) to which Infraco was a party would touch all the countries on the African coast.  There would be much more critical mass.  WACS would also serve as redundancy for SEACOM.

He acknowledged that Neotel was Infraco’s only customer.  Infraco had a mission to provide cost-effective broadband services.  In terms of the Electronic Communications Act (ECA), Infraco could not perform this function until it had a licence.  This was the reason for the arrangement with Neotel, as Infraco’s licence problem could not hold Neotel back.  There was a sub-contractual relationship.  Infraco provided the infrastructure for Neotel.  Once the licensing issue had been dealt with Infraco could service all potential customers.

Mr Mthembu said that Infraco’s objectives were being fulfilled.  In terms of the long distance national network, there had been just under 6 000 km of network cabling in 2007.  The consortium had now doubled the network to cover approximately 13 000 km.  This was all new infrastructure and was driven by Neotel’s needs.  Points of Presence (POPs) had been established for Namibia, Botswana, Lesotho, Swaziland, Mozambique and Zimbabwe.  Infraco’s further programme would be driven by the needs of government.  It would go where no one else would care to invest.  In 2008 Infraco had added 7 000 km to its network.

He said that the second objective was to provide a telecommunication connectivity service at lower rates than present.  The Infraco shareholders had set a mandate of achieving a utility rate of return.  Infraco could offer significantly lower prices once it was licensed.  He was confident that this would happen within the next two months.

Mr Mthembu said that the third objective was providing support for projects of national importance.  A particular partner was the Department of Science and Technology (DST) and a significant project was the Square Kilometre Array (SKA) astronomical project.  Infraco was in the process of working with DST to quantify its requirements and to determine the amount of capacity that would be needed.

He said the final objective was to follow a model of good corporate governance and international best practice.  Infraco followed the requirements of the Public Finance Management Act (PFMA), the guidelines of King 2 Corporate Governance practice, and had a fraud programme. He felt that these were the basics of good business practice.

Mr Mthembu said that South Africa would retain its IP rights regarding the WACS.  The rules were defined in the management agreement, which stipulated the relations between the founding parties.  Infraco was a 12% participant.  This share equated to an investment of approximately $670 million.  The agreement covered all aspects of property, cost and usage.  The cable itself was a joint effort, but where it landed in a particular country the authority there was responsible for selling capacity and determining its own price for usage.

The Chairperson asked what was meant by “handshakes”.  She asked that Broadband Infraco supply the Committee with the rules regarding the WACS.  She asked who else had ownership.

Mr Mthembu said that the handshakes were a technique to bring long distance data lines to the POP in each respective country.  In its international and domestic operation Infraco provided the terminal equipment to which its customers could connect its own networks.  He said that the Chief Executive Officer would provide the Committee with a synopsis.

Ms Mentor asked if the 12% agreement had been signed.

Mr Mthembu replied that the agreement had been signed on 8 April 2009.  It was now in its implementation phase.

Presentation of Chief Executive Officer’s Report
Mr Dave Smith, Chief Executive Officer, Broadband Infraco, continued with the presentation.  He noted that the new corporate colours were being used.  The company was focusing on consolidating its expansion programme and developing the international component.  The WACS agreement terms had been completed.  The procurement phase was complete. 

He said that there were a number of milestones in the licensing process.  The Broadband Infraco Act had become effective on 1 February 2008.  The Amendment to the ECA had become effective the following day.  The Minister of Communications had to issue policy guidelines to the Independent Communications Authority of South Africa (ICASA).  This had happened in early 2009.  ICASA had started the licensing process in March and Infraco had submitted its application in April 2009.  The application had been published, after which a public hearing process had been conducted.  The negotiations had been completed on 3 August 2009 and the ICASA Council was now considering the matter.  The licence might be issued during September 2009.

Mr Smith said that once the licence was granted, Infraco would work towards providing open access to broadband connectivity.  Its tariffs had already been filed with ICASA and were in the public domain.  It would act as a wholesale carrier.  There were up to 300 licensed operators.  Infraco would concentrate on providing coverage to areas that were under serviced in the past.  This was in fact a licence condition.

He said that the expansion would lead to an increase in the footprint of coverage.  Capacity would increase by 30%.  Infraco was working on the availability and reliability of the network.  The number of sites had increased to 130.  He showed the Committee maps of the network coverage.  Two significant points were Mtumzini in KwaZulu-Natal, which was the landing point for the SEAPAC cable, and Yzerfontein in the Western Cape, which would be the terminal for WACS.  He stressed that Infraco could not operate before the licence was approved.  At the moment it was outsourcing its facilities to Neotel and manufacturers.  Eskom and Transnet conducted maintenance on their own networks.  Infraco attached its cable to its transmission lines.

Discussion
The Chairperson asked how regularly maintenance was carried out.

Mr Smith replied that maintenance was a continuous task.  All large South African operators would have access to WACS.  There were numerous international investors.  There were four partners at the top level, each of which had a 12% share of the project.  These were Broadband Infraco, MTN, Cable & Wireless and Angola Telecom.  Infraco’s share was funded through debt and equity.  Sound economic principles were being applied, which would help the SOE achieve its mandate.  The cable would have a capacity of at least 3.8 Terabits.  This was a very large amount of data.  Since the end of the 2008/09 financial year (FY) the capacity had been increased to 5.1 Tbs due to additional optical ability.  It would be operational by the second half of 2011.

Mr L Greyling (ID) asked if the completion date of 2011 would present a problem for the World Cup in 2010.  He asked if there was already enough broadband capacity to satisfy all needs during the event.

Mr Smith replied that the existing SAT3 cable, which had been upgraded, would meet the requirements of 2010.  In terms of empowerment, Infraco was an SOE and therefore subscribed to Broad-based Black Economic Empowerment (BBBEE) codes.  BBBEE procurement stood at 70%.  In terms of human capital, there had still been issues at the start of the year due to Eskom Enterprises.  Infraco now had its own staff.  There were currently 55 staff members, but this would increase to approximately 150 by the end of the current FY.  In terms of race and gender Infraco was doing well, with figures of 73% and 43% respectively.

Ms D Ramodibe (ANC) said that the Committee needed this information in writing.

Mr Smith said that he would provide the Committee with the detailed breakdown of the figures.

The Chairperson said that the Committee should conduct site visits.  She asked how this could be done, and if it was possible for Infraco to provide some kind of simulation of its activities.  She could not understand some aspects of the presentation.

Mr Mthembu said that it was a difficult operation to demonstrate.  The network was all hanging from power line pylons.  Infraco could only show the Committee a terminal room.  It could be quite a trip, but Infraco could put a programme together.  Pictures did not tell the story.  There was nothing to see at the moment regarding the WACS.  In 2010 the cable would be manufactured in Calais.  By December 2010 the laying of the cable would begin, and perhaps a visit to one of the ships could be arranged then.  This would all be happening after the licence was granted.

Dr S Pillay (ANC) reminded the delegation that Infraco was talking to lay persons, and it was difficult for Members who were not versed in the subject to see what the needs were.  The Committee wished to see what the practical implications were.

Dr Koornhof congratulated Infraco on a good report.  He questioned the long delay with the licence issue.  He asked how this had happened.  It could have been the result of Ministerial policy directives, delays in ICASA or in Infraco themselves.  The Chairman had said that this was the only outstanding issue.  In fact, there were two licences involved, namely an Electronic Communications Network Systems (ECNS) licence and an Electronic Communications Systems (ECS) licence.  He asked where the company’s three-year business plan was, and if this could be supplied to the Committee.  This was necessary for the Members to monitor and oversee Infraco’s activities.  It talked to the AR and the budget.  Mention was made in the presentation on funding for the network in terms of capital expenditure.  The presentation said that three institutions were involved.  He asked where these loans had been secured, given the global credit crunch.  Interest payments alone were R55.3 million.  He asked if the money had been sourced on the money market.  The presentation described the current FY as a watershed year.  He asked if this was because of the licensing process or the infrastructure rollout.

Mr E Rasool (ANC) commented on the licensing delay.  He was worried what the effects would be.  Infraco had a close relationship with Neotel, which held the licence.  He asked if this would ensure that Neotel held the inside track by 2011.  There was a massive scope of work to move from the national grid into the country, and Neotel could be advantaged.  There was a free flow of information and technology.  This was creating an unhealthy situation.

Mr Smith replied that it was indeed a watershed year for Infraco.  Infraco expected to be awarded its licences after which Infraco would be able to offer open access.  The award of the licence would also see an end to the exclusive arrangement with Neotel.  This would enable Infraco to diversify its revenue stream.

Mr Mthembu added that the current arrangement with Neotel was not the preferred route.  Given the delays in awarding the SNO licence it was a moral obligation on government, and also a potentially legal obligation, for government to help Neotel get going.  Long standing promises had to be kept.  It was not a commercially sound idea, but it had had to be done.

Mr Smith said that it was encouraging to hear that Neotel wished to buy Broadband Infraco.  This indicated the company’s value.  In terms of the business plan Infraco had to tread carefully.  Plans had to be submitted to the shareholders.  The route to follow would be from the DPE, through the shareholders to the Committee.

Dr Koornhof said that Infraco was an SOE.  A service provider was needed.

Mr Smith said that this had been done.  The plans had gone to the Minister.  Infraco could proceed when the Minister approved the plan.

The Chairperson found the situation unacceptable.  The Committee needed to see the business plan.  If it was ready then Infraco must send a copy to both the Minister and the Committee.

Dr Pillay said that the Ministry should be represented at this meeting.

Mr Mthembu said that Infraco were struggling with the protocol.  The Chairman’s report had been sent to the Minister.  Infraco would revert to him.

Ms Jacky Molisane, Chief Director: Energy and Broadband, Department of Public Enterprises, said that the Department had analysed the potential benefits.

Dr Koornhof asked if the business plan would be tabled in Parliament.

Mr van Dyk questioned the absence of the full DPE delegation.  He noted that he and some of his colleagues had also flown to Cape Town that morning from Johannesburg, but had taken a flight at 06h00 to be on time for the meeting.  The DPE representatives should have done the same.

The Chairperson expressed her concerns. She said that it would not be possible to deal with this matter in late September. The AR had to go to the Minister before the next meeting.  She would write to the Minister regarding the business plan.  This should be received within ten days.

Mr Smith answered the question on investment.  A diversification strategy had been the approach of the Board.  The money market had been used to source finance.  There had never been any dispute over the award of the ECNS licence.  The problem lay with the ECS licence.  Other organisations had made representations in this regard.  Other operators should be allowed to gain access to the market and provide the services that Infraco could provide.  Significant time had been spent on this issue.  Infraco had put forward its understanding, but the legislation was difficult to interpret.  ICASA itself was seeking legal advice.  The impact of the delay was that Neotel was making exclusive use of Infraco’s services.  Infraco could not make its infrastructure available to any other parties until such time as the licence was granted.  However, he was not overly concerned about this situation, and did not believe that other parties would be prejudiced when Infraco was able to operate freely.

Dr Pillay said that he did still not have a clear understanding.  He agreed that the legislation was difficult.  There was a difference between a deemed and a non-deemed licence.  The deemed licence seemed to create the impression that there was an unfair advantage in favour of the SOE.  The objection was to the granting of the ECS licence, as this was seen to create unfair competition.  There was not much objection to the ECNS licence.  He asked if the applications had been made jointly or separately.  He asked why the ECNS licence had not been granted immediately.  The country needed the infrastructure.  He asked if there was any competition in this sphere.  He asked what ICASA had to do.  It might take months to get a legal opinion.  In any event, he said that if ten lawyers were in the same room, they would produce ten different opinions.

The Chairperson asked Dr Koornhof if he was happy with this explanation, as she was not.

Dr Koornhof said that it still lacked clarity.  He asked why the ECNS licence had not been granted.  This Committee should discuss the matter with other relevant Committees.  There was no guarantee or certainty that the licence would be granted.  He was satisfied with the option of using money market funding.

Ms Mentor suggested that ICASA be invited to speak to the Committee.

Mr Mthembu agreed that the money market was the safest option.  Infraco needed money for infrastructure development.

Mr Smith said that the BIA was clear.  Infraco had to apply for a licence but the granting thereof would be at the discretion of ICASA.  Infraco had complied with the Act by applying for both.  Infraco’s interpretation of the Act was that the ECNS licence was the minimum requirement for ownership of infrastructure.  The ECS licence was necessary to provide a telecommunications service.  It was therefore necessary to apply for both together.  The waters had been muddied.  It was possible that certain interest groups were attempting to keep Infraco out of the sector.  He could not give the way forward without a legal opinion.

Mr Mthembu said that Mr Smith had only skirted round the issue.  Infraco had applied for both licences.  There had been lengthy deliberations.  The Act of Incorporation specified that Infraco would need two licences.  This was also the opinion of the State Law Advisors, the Department of Communication (DoC) and other operators.  Objections to the licence applications had been forwarded, and eighteen months of deliberations had followed.  Opposing parties raised objections when the BIA was being promulgated and raised the same objections when Broadband Infraco had applied for the licences.

He said that ICASA was about to recommend the granting of the licence in July 2009, but the process had been halted.  The DoC had issued a directive in this regard but he did not know what the basis for it had been. Since then there had been a lot of debate to explain the rationale.  The Ministers of Communication and Public Enterprises had decided that the two Departments should get a joint legal opinion.  Instead of this, the DPE, Infraco and then the DoC had all taken their own separate legal advice.  These opinions were in conflict.  Broadband Infraco had been told that ICASA had referred the matter to its legal department, which would forward a recommendation.

The Chairperson said that a decision was needed immediately.  It was causing a serious problem.

Ms Molisane said that the main issue lay with ICASA.  The DoC had written a letter.  The DPE had felt the need to get its own opinion as a result of this, and conflict had arisen.  Infraco had engaged with ICASA to express an opinion that the process should go ahead.  However, ICASA was an independent body.

Dr Pillay said that he was struggling to follow the discussion.  In terms of the ECA, the Minister had to give guidelines.  Another Act, the BIA,  had then been passed.  Public hearings had been held and submissions had been tabled.  There had been a call for participation.  Certain objections had been overruled.  The legislators had applied their mind to the problem, and if there were any suggestion that the Act was unconstitutional then it would have been referred to the Constitutional Court.  The objections were in fact to the policies in the licensing process.  The same objections had been heard in the process leading up to the formulation of the BIA. Effectively, those who objected were being given a second bite at the issue, and he was not sure that this was fair.

Dr Pillay asked if government was still in control of the process.  He felt that in this case too much democracy was leading to an undemocratic process, which now boiled down to bureaucracy. He had seen two of the three legal opinions.  A provisional, conditional licence was a possibility.  The blockages caused by private vested interests were responsible for a major investment gathering dust.  He proposed that both Ministers be called to account.  The Committee had to engage with ICASA to seek a solution. Any legal action in court would lead to more delays.

Dr Koornhof said that the Committee could only act on what was in the AR.  The process had been clearly stated, but was now being derailed.  The Ministerial policy directive had been withdrawn.  He agreed that the Committee should call in both Ministers and ICASA.  Infraco could not walk away from its responsibilities.

Mr Greyling saw a similar situation arising as with the cellular telephone rates debate.  The problem of expediting the application lay at ICASA.  However, this was a legally independent body.  Parliament could question its actions, but could not put it under pressure.  The Committee needed the two Departments and their Ministers to agree on a legal opinion.

The Chairperson said that the Ministers and ICASA were stalling the process.

Mr M Nhanha (COPE) said that the situation was embarrassing.  Private business would not advance the country’s interests.  He suspected a conspiracy theory linked to money and profit, and he agreed that the Minister would have to explain.

The Chairperson said that the proposed meeting would be called within two weeks. She asked if ICASA was fulfilling its mandate.  Infraco had a right to pose this question.  She also felt that there had been collusion on the cellular telephone issue.

Ms Borman noted that Broadband Infraco did not want to have to revert to the fiscus for funding.  Infraco planned to be self-sustaining, and said that this may well emerge from the business plan.  She asked if Infraco had any financial partners.  On the human equity issue, she asked when the target of 150 staff members would be reached.

Mr Nhanha was impressed with Infraco’s new corporate identity.  He asked if the company’s ecological philosophy was as green as its corporate colour, especially regarding the submarine cable.  He wondered what the impact of laying the cable would be on scarce fish resources.  He also felt that there was a risk posed by piracy.  Pirates were active on the east coast of Africa but had been curbed by naval patrols.  He felt that Infraco might shift its activities to the west coast.  He asked if there was a contingency plan to deal with piracy.  He also asked if Infraco had any safety measures to ensure that the WACS project was not affected by global warming.

Mr van Dyk said that the Committee had a responsibility to monitor and evaluate the performance of Capacity.  Broadband Infraco was a young company, and there should be proper management to guide it at this crucial stage of its development.  He looked at the statistics regarding the  directors.  The risk committee had a 50% attendance, that of the human resource committee was also 50% and for the investment and financial committee only 22%.  He asked if this could be called “good practice”.  Important decisions had to be taken at these meetings.  Turning to the balance sheet, he found it curious that the assets and liabilities should balance to the cent.  He asked if this was a sign of good management or of someone using creative accounting. He pointed out that accounting was required to be on the accrual basis but it seemed to him that Infraco was accounting on a cash basis.

Ms Ramodibe, acting as Chairperson, told Mr van Dyk that these questions should only have been raised once the relevant part of the presentation had been made.

Dr Pillay had also thought of some questions in relation to the corporate governance segment of the presentation.  He asked how an SOE should perform.  It was not necessary to make a huge profit.  Its objective should be to create a basis for the country to compete internationally.  There was no worry if Infraco did not make a profit, as long as it was keeping costs down.  He asked what the return on investment was.

Dr Pillay asked if the 12% stake in WACS would be sufficient, and for how long it would be sufficient to serve the country.  A risk analysis was needed to see how quickly Infraco could respond to alternate technologies.  He understood the relationship with Neotel, but asked how easy it would be to negotiate an amicable divorce with them when the time came.  Infraco seemed to rely a lot on outsourcing at present.  He asked how quickly Infraco could build up its in-house capacity, and if Infraco was training enough people.  Parastatals had a responsibility to get involved in education, particularly regarding scarce skills.

Ms Ramodibe said that one of Infraco’s corporate values was customer satisfaction.  She asked if the price of Infraco’s services was being kept down.

Mr M Mangena (Azapo) said that Broadband Infraco’s services were required for large-scale national projects.  Some were reliant on high data volumes.  He was not sure if this could be done.  Billions of rand were involved.  There was a need for guaranteed, dedicated capacity.

Mr Mthembu said that Infraco worked closely with DST on projects such as SKA.  There was particularly close liaison on issues of capacity.  The issue was also factored into other DST projects.  The question of self-sufficiency was covered in the business plan.  There would be a short-term requirement for funding from the fiscus.

Mr Smith said that Infraco was in the third year of the Medium Term Expenditure Framework (MTEF) cycle.  The final contributions would be made in 2010.  Government was a 74% shareholder in Infraco and the remaining 26% rested with the Industrial Development Corporation (IDC).  Infraco’s partners would see it through the funding shortfall.  Infraco had a senior debt package with the Development Bank of Southern Africa (DBSA).  At present Infraco needed R294 million to cover the shortfall on the WACS project.  In time there would be no additional equity-funding requirement from government.

He said that many SOEs faced the challenge of skills shortages.  Infraco was making headway with its staffing requirement.  Training was being conducted in various areas.  Priority areas were technical and project managers and candidates were currently being identified.  Infraco’s goal was to serve customer needs.  The terms of the contract with Neotel were clear.  Although the exclusive nature of the current relationship would cease when Infraco was granted its licence, Infraco would remain the front-end customer for one year.

Mr Smith said that Infraco subscribed to all health and safety issues.  All the required environmental impact assessments (EIAs) relating to the WACS project had been integrated into the planning.  Piracy was a difficult question.  The South African Navy (SAN) could assist.  He did not foresee any problems due to global warming.

Mr Mthembu admitted that the attendance of directors was below expectation.  Infraco had commissioned PriceWaterhouseCoopers to conduct an evaluation on the effectiveness of the Board.  A report would be forwarded to the Board and the shareholders.  The first report had been finalised.  All necessary actions would be taken.

Mr Suren Maharaj, Chief Financial Officer, Broadband Infraco, confirmed that the accounting was on an accrual basis.

Mr Smith said that Infraco had been required to give ICASA an indication of its prices.  Infraco compared well to current service providers.  A discount of up to 50% would be offered on data traffic between Cape Town and Johannesburg.  The DPE would quantify the economic benefits of the SOE compared to the international market.  The 12% stake in WACS would be more than enough to cover South Africa’s needs for data traffic between the country and the United Kingdom and the United States of America.  There were also some internal projects.  Infraco constantly reviewed the market for new technology.

Mr Mthembu asked if Neotel was passing on the benefits.

Mr Smith said that there was no legal basis to force Neotel to pass on any price benefits.  He could not assure the Committee that this was being done.

Mr Mthembu said that Neotel’s prices were higher than expected.  He was not comfortable with this, but Infraco had no way to enforce prices.

Dr Pillay asked if the granting of an ECS licence would create competition.

Mr Smith emphasised that Infraco needed both licences in order to operate.

Mr C Gololo (ANC) noted and expressed his appreciation that R69.3 million had been spent with BBBEE companies during the 2008/09 FY.  He asked which companies had benefited from this, and asked for a breakdown. He asked how the global economic meltdown had affected Infraco.

Mr van Dyk noted that Infraco was already showing a profit.  He asked if this was not too fast for a company at this early stage.  It told him Infraco might have spent too little on growth.

Ms F Hajaig (ANC) asked whether the WACS cable would be laid in international waters or the territorial waters of the countries it passed.  Some of the countries were in a state of conflict.

Dr Koornhof asked if there was a code of conduct for the directors, and if so,  if all directors of Infraco had signed it.  He asked if Infraco made declarations of interests.  He asked if the figures quoted in the report were the full remuneration packages.  In terms of Infraco’s capital programme he noted that the target of new facilities had not been achieved.  The achieved figure was 83%.  He asked if this was a once off problem due to site access.  There was a high variance in project costs.  He asked if this was due to a project being planned but not run by the customer.  Finally, he asked if the Chairman was satisfied that the tender and procurement committee had only met once.  The human resources committee had also only held one meeting.

Ms Borman noted that only three of the twelve directors were women, which equated to 25%.  This was inadequate.

Mr Nhanha said that the question of piracy had been glossed over.  If Infraco had to call in the South African National Defence Force to deal with piracy there could be a delay, and even a single day’s delay could prove expensive.

Mr Smith undertook to provide the Committee with a list of BBBEE companies.  Infraco had not been severely impacted by the economic meltdown.  In fact, the lower demand had sent a drop in the cost of equipment imported from Europe while the rand was also stronger.  In terms of profit, Infraco was still making a loss regarding operating costs.  This situation would persist for a while still.  The WACS cable would be laid primarily in international waters.  Permits would be needed to take the connecting cables to the landing points ashore through territorial waters, but that would be the responsibility of the licensed operator in that country.

Mr Mthembu said that in most cases the licensed operators were members of the consortium, and this would be their own responsibility.  There was a code of conduct for the directors and all had signed it.  The declaration of interests was updated at each board meeting and could be made available to the Committee.

Mr Smith said that all remuneration for the directors was incorporated into the report.  There was no incentive payment.  Infraco had identified shortcomings in the capital programme.  These were related to skills availability.  It was hard to source suitably qualified project managers.  Neotel did not initiate any of Infraco’s projects.  Infraco would establish facilities if this was not done by the customers.  The 37% variance on the capital programme was a result of projects that had been planned but not followed through, due to a lack of commitment.  This represented a capital saving.

Mr Maharaj explained that there was a delegation of authority in place.  Full committee meetings in terms for the procurement and human resources committees were only needed to authorise expenses exceeding R35 million.  There was an internal audit committee in place.

Mr Mthembu said that the inaugural Board had been chosen by the shareholders.  Infraco was conscious of the need to increase the female representivity. 

Dr Koornhof said it was not acceptable to underspend on capital expenditure projects.

Mr Smith said that he had already answered this question.  Broadband Infraco could not commit itself to capital expenditure projects to benefit Neotel without a contract being in place.  Neotel had tendered unsuccessfully for some contracts.  He said that Infraco had enjoyed an unqualified audit.  There were no issues of non-compliance to the PFMA.

Mr Mthembu said that the company was on the right track.  The only outstanding issue was the licence.

The Chairperson said that there were a number of documents outstanding.  A meeting would be called with the two Ministers and ICASA within the next two weeks.  She was not happy with the “Neotel story”,  and might reopen the issue.

Mr Mthembu asked what she meant by her reference to the “Neotel story”.

The Chairperson replied that she wanted to know how long the contract would be in place.  In particular she questioned the twelve-month period after the granting of the licence.

Mr Smith replied that that was the way the contract was structured.  Neotel would remain a valued customer but Infraco had to build its internal capacity.

Mr Mthembu said there was nothing to prevent them from serving other customers.

Ms Molisane said that most issues had been addressed.  The DPE wanted to make sure that Broadband Infraco would be viable.

The meeting was adjourned.