Public Hearings on the Broadband Infraco Bill: Day 1

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Public Enterprises

31 July 2007
Chairperson: Co-Chairpersons: Mr Y Carrim (ANC), Mr C Wang (ANC), Mr E Kholwane (ANC),Mr G Oliphant (ANC)
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Meeting Summary

The Committee, together with representatives from the Communications Portfolio Committee,  held public hearings on the Broadband Infraco Bill. The Department of Public Enterprises explained that the purpose of the Bill was to provide for the licensing of Infraco, the acquisition of the Infraco shareholding by government, and for the future conversion of Infraco into a public company. Oral submissions were received from The Universal Service and Access Agency of South Africa (USAASA) and the Competition Commission. The USAASA presentation outlined concerns with regard to the licensing, rights of way and the objectives of Infraco. The Competition Commission presentation outlined the importance of effective competition, and the anti-competitive practices that were being investigated by the Commission in the broadband and related markets.

The Chairperson noted that many of the issues that had been covered during the submissions did not fall under the Committee’s portfolio, and that this should have been a joint Bill, with the Communications Portfolio Committee. He added that this Committee would not be supporting the passing of the Bill unless there was full cooperation from the Communications Portfolio Committee. Members asked for clarity with regard to the scheduling of Infraco, and for clarity on the merits and demerits of the two types of scheduling. They were concerned that the new organisations should not be allowed to develop into simply another Telkom. Members also requested for a short presentation from the Department of Communications on the Electronic Communications Act. It was felt that this process should not be rushed, as it was important for everyone to gain a thorough understanding of the Bill.

Meeting report

Broadband Infraco Bill (the Bill): Department of Public Enterprises (DPE) Briefing
Ms Portia Molefe, Director General, DPE, and Ms Ursula Fikelepi, Legal Services, DPE, introduced and explained the Bill, focusing on its purpose and implications. The Bill was intended to provide for the licensing of Infraco, the acquisition of the Infraco shareholding by government, and for the future conversion of Infraco into a public company. Since the Bill was introduced public comment had been received from various stakeholders and the comments largely expressed support for the concept of Infraco. With regard to licensing the Minister of Communications would instruct Infraco to submit the relevant documents necessary for it to be issued with a licence, under the terms and conditions stipulated by the Electronic Communications Act (ECA). In terms of servitudes and expropriation, the Bill would authorise Infraco to exercise all of the rights, primarily servitude rights, attaching to the Full Services Network (FSN). The Bill further authorized the Minister of Public Enterprises to expropriate land on behalf of Infraco and pay compensation as contemplated in the Constitution, whereupon Infraco would become the owner of the expropriated land. The Bill would authorise government to acquire the shareholding in Infraco. The possibility for the conversion of Infraco into a public company would enable Infraco to access funding from the private sector.

Mr P Hendrikse (ANC) asked for clarification with regards to rights of labour tenants during the expropriation process.

Ms Fikelepi replied that the labour tenant rights would not ordinarily be registered against the land or the land owner. The legislation recognized the fact that labour tenants who had lived on a property for a certain amount of time did acquire certain rights.

The Chairperson asked for clarity regarding the merits and demerits arising from the scheduling of Infraco.

Ms Molefe responded that the merits and demerit were primarily of a functional nature. A Schedule 2 relationship with the shareholder was a standard relationship, and government’s role was limited. The borrowing programme of the entity would be approved by National Treasury and not the shareholding Ministry. It should be noted that there has been ongoing discussions with Treasury, with regard to amending the Public Finance Management Act (PFMA), as there was no provision in the PFMA that created a clear process on progression from Schedule 3 to Schedule 2 entities. Bearing in mind that this enterprise was established for the first time, the Department was of the view that there could be conditions attached to being named in Schedule 2. The Department would need to meet these until such time as it believed that the entity would be able to operate independently in the market.   .

The Chairperson asked Ms Molefe to confirm whether a Schedule 2 listing would result in a more independent Board, whereas a Schedule 3 listing would require dealing with the Minister of Finance.

Ms Molefe replied that in Schedule 2 provision was made for balance of power between the shareholding Ministry and the National Treasury. It should also be noted that one of the requirements for a Schedule 3 listing was that the borrowing plans of the entity were gazetted.

The Chairperson asked for clarity on whether was there was a provision for migration from a Schedule 3 to a schedule 2, during the amendment process of the PFMA.

Ms Molefe replied that she was not sure about whether there were any provisions and that Treasury would be in a better position to answer.

Mr Oliphant stated that it was in the interest of Infraco to take the route of becoming a Schedule 2 entity at an early stage, as the reclassification was difficult

The Chairperson stated that issue partly revolved around what role the Department saw for Infraco

Mr R Mohlalonga (ANC) stated that there were various choices that were made in reaching the conclusion that Infraco was needed as a stand alone company. He asked the Department to comment on the policy rationale for Infraco and also on the licensing process under the ECA. The Department should also comment on Infraco’s exclusivity to Neotel, and whether it would address the issue of the high cost of telecommunications. Clarity should also be provided on the various undersea cables, and whether there was a possibility of the duplication of infrastructure.

Ms Molefe responded that Sentech was a company that had been in the broadcast space and the wireless environment. Infraco would not become involved in the wireless space or services, and wireless services would be provided via Sentech. The exclusivity of Neotel was part of a marketing arrangement, and it was not in the classic sense a duopoly. It should also be noted that everyone would have access to Infraco’s capacity but that this access would be granted through Neotel. With regard to the undersea cable, there would be no duplication of infrastructure, in that Infraco would be running on the West Coast Cable, which would start where the East Coast Cable ended.

Ms Mashila Matlala, Senior Manager, Telecommunications Policy, Department of Communications, added that in terms of the licensing process, the Minister of Communications was to issue an Invitation to Apply (ITA) to Infraco. It was not possible for the Independent Communications Authority of South Africa (ICASA) to do so, as the ECA stipulated that ICASA should invite all interested parties, and no single invitation could be issued by ICASA.

The Chairperson asked whether the Department of Communications was comfortable with what was presented in the Bill.

Ms Matlala replied that the Department was comfortable with the Bill as long as it was accepted as it stood at present.

Dr S Van Dyk (DA) stated that on closer inspection, the purpose of the Bill was to regulate the communications sector and to provide broadband access to everyone. Clarity should be provided on the issue of competitiveness, and whether the services would be subsidised.

Ms Molefe responded that the Department had no authority to regulate the sector. On the issue of pricing, the Department wanted to attain a utility rate of return, which would allow the Department to recoup the cost of borrowing. It should also be noted that in the establishment of the Infraco’s  infrastructure, there would be a point where the price would be as low as possible and infrastructure would be available in abundance. Once that situation was reached it would be possible to pay dividends to the state.

Universal Service and Access Agency of South Africa (USAASA) Submissions
Ms Cassandra Gabriel, Chairperson, USAASA and Mr James Theledi, CEO of USAASA made submissions on the Bill to the Committee. These outlined USAASA’s concerns with regard to the licensing, rights of way and the objectives of Infraco. USAASA agreed with the provisions that would enable Infraco to provide affordable broadband access to all areas. USAASA however argued for the inclusion of a provision that specifically stated that Infraco would provide affordable broadband access to all areas, including the under-serviced areas. With regard to the licencing, USAASA was concerned that Infraco would not be able to meet its objectives without a licence that was issued under the Electronic Communications Act. USAASA also agreed with the provisions that had been made with regard to the land expropriation, and believed that they were necessary.

Mr C Wang (ANC) asked for clarity on the Agency’s delivery of government services and also asked it to comment on its policy.

Mr Theledi stated that there was a process of evaluating projects and there has been some work done with the Government Communication Systems (GCIS) in various centres. Work had also been done with the Centre for Information Technology in Africa (CITA), which helped with the procurement of equipment. It should be noted that the Agency was ensuring that internet access was provided at the schools and community centres. Therefore the issue of broadband deeply affected the organisation

Dr Van Dyk stated that any broad-based organisation could not have small targets, and asked for comment on the targets described.

Ms Gabriel replied that the relevant targets for Infraco would be the roll out of the broadband infrastructure. It should be noted that most of the capacity in terms of infrastructure rollout existed in the Metros. Therefore the targets should therefore be focused on the time frames of rolling out similar infrastructure in under-developed areas.

The Chairperson stated that some of the issues raised were matters pertaining to policy. He believed that USAASA should have raised issues that needed to be put into the Bill and that it believed demanded the Committee’s attention. USAASA had been given seven days to submit these issues, and only when the Committee was sufficiently convinced that the organisation had a national interest; might it draw on its services.

Ms S De Vos (IFP) asked for clarity regarding the shareholding by other companies.

Ms Molefe responded that the company would be 100% state owned, and the participation of the private companies would be to buy capacity on the undersea cable.

Competition Commission Submission
Mr Simon Robertson, Chief Economist, Competition Commission and Mr Thembinkosi Bonakele, Head of Mergers, Competition Commission presented submissions to the Committee. The presentation outlined the importance of effective competition, and the anti-competitive practices that were currently being investigated by the Commission in the broadband and related markets. The presentation also touched on Infraco’s relationship with Neotel and methods of ensuring that Infraco achieved its objectives. It was stated that there had been a range of complaints against Telkom that were being investigated or had been referred to the Competition Tribunal relating to broadband. These cases highlighted competition concerns arising in the internet access environment, and showed the need for the Infraco intervention. With regard to Infraco’s exclusivity arrangement with Neotel the Commission believed that effective competition in the market would be furthered if Infraco was able to supply other customers.

The Chairperson asked the Commission to state whether it had a view on the scheduling and the licensing of Infraco, and also called for comment whether the path that the Department had chosen was correct and whether there was a likelihood of legal challenge.

Mr Robertson responded that the Commission had a view on the scheduling, in terms of the impediments for Sentech, concerns on the entities’ ability to operate, and the important role of government as a shareholder.  The Commission’s view echoed the view of the Department in that Infraco should be listed as a Schedule 2 entity.

Mr Bonakele added that the Commission had no view on licensing of the entity. Commenting on the scheduling path chosen by the Department, he noted that the market was very concentrated. The introduction of Infraco would cause rivalry within the market.

Mr Hendrikse believed that it was not necessary for the Committee to rush through the Bill as it was important for everyone to gain a thorough understanding of it.

The Chairperson stated that the Committee would engage with the stakeholders properly and would not rush through the Bill. The Committee was willing to engage with any organisation on what it thought should be included in the Bill. It should also be noted that the hearing was not structured in any particular way and that everyone would receive the same attention.

Ms D Smuts (DA) stated that the Commission’s description of the dominant telecommunication companies was very good. It should be noted that the Minister of Public Enterprises addressed a bottleneck when he decided to make Infraco a State-owned enterprise. Infraco, however, would not be leasing facilities to players, but Neotel would do so. Therefore the very problem that the Minister was trying to address would once again be created as Neotel might behave exactly like the dominant players in the market.

Mr Bonakele stated that there many ongoing cases that centred on the dominant companies, and the Commission was happy to discuss disputes regarding those cases. It should be noted however that the Commission had not made any findings of guilty, and had rather left this for the Courts to decide. With regard to the relationship between Neotel and Infraco, the Commission had raised the matter with the Department of Public Enterprises, and the Department had understood the Commission’s concern regarding the matter.

Mr Robertson added that the Commission had strong powers in identifying cases of collusion and it strengthened ICASA’S hand in making sure that the cases did not happen in the future. Therefore ICASA played a complementary role in assisting the Commission in fulfilling its work. With regard to the exclusivity, the Commission was interested in the outcomes of effective competition, and the Commission would prefer for Infraco to potentially be a competitor in its own right, and for the terms of exclusivity should be looked at.

Mr Mohlalonga stated that in the submission by the Department there had been specific comment on the content of the Bill. There was a part that dealt with the conflict of laws, stating that in the event of any conflict between the provisions of this Bill, and the ECA or the Competition Act, then the Bill’s clauses should prevail. He asked for comment on this aspect.

Mr Bonakele replied that the issue regarding prevalence of one piece of legislation over another rested in the hands of Parliament.

Mr Mohlalonga noted that the Commission spoke about Infraco receiving an electronic communications network licence. In terms of the ECA, an entity holding such a licence would have the authority to provide broadband and fixed line infrastructure. He asked for comment whether the Commission was of the view that other players in the industry with a similar licence would be able to provide the same kinds of services.

Ms Molefe replied that the some of the risks that would be faced with the exclusivity arrangement included the pricing and the bundling of service agreements. The Department had argued that Infraco should have a legal arrangement ensuring that there was transparency in the pricing and the structuring of services. Neotel and Infraco would require the exclusive arrangement in order for them to effectively compete against Telkom. It should be noted that Neotel did have its own infrastructure in the metros and they too had to apply for a licence to operate in the Metros.

Mr Hendrikse stated that there should be a greater focus on the submissions that have been made. It should also be noted that the submissions had thus far tended to focus on the objectives of the Bill. Despite the noble objectives caution should be exercised that another Telkom was not being created. It was to learn lessons from the submissions that had been made by the Competition Commission.

Mr Wang asked the Commission to comment on the issue regarding Infraco taking ownership on the undersea cable. He commented that the Department’s study on the under sea cable should be open to Members even if it happened in a closed meeting.

Mr Robertson replied that the Commission had a preliminary understanding of the matter; however there were concerns of sales of the bandwidth to the private sector.

Mr Oliphant stated that the matters pertaining to the Bill should be highlighted and that the ICASA submission would be very important.

Ms Molefe stated that the Bill was presented at a very bad time, coinciding with the introduction of the undersea cable. It should be noted that the exclusivity arrangement existed only as a national backbone and had nothing to do with the undersea cable.

Mr Hendrikse requested that the Department of Communications should give a short presentation on the Electronic Communications Act to the Committee.

The meeting was adjourned


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