Sentech 2012 Strategic Plan

Meeting report

Strategic Plan and Budget of Sentech
Mr Paris Mashile, Acting Chairperson of the Sentech Board introduced the delegates to the Committee.

Dr Setumo Mohapi, Chief Executive Officer, Sentech presented the briefing to the Committee (see attached document).

The foreword explained what had informed the strategic plan, which had been presented to the Minister of Communications.  Sentech’s vision and mission statements remained unchanged.  The company’s public service mandate was positioned within the White Paper on Broadcasting Policy (1998), the Broadband Policy for South Africa (2010), the Broadcasting Digital Migration Policy (2012) and the Draft Policy Directions for Electronic Communications Services in the High Demand Spectrum (2011).

Sentech’s strategic goals supported the goals of the Department of Communications.  Six key strategic focus areas were identified: customers and stakeholders; infrastructure; solutions and interventions; employees; sustainability and governance.  The strategic roadmap included an overview of the industry outlook and the policy and regulatory environment.

Sentech’s business strategy focused on providing universal access to broadcasting and broadband services; open access and inter-operability and diversity and affordability.  The business model adopted in 2010/11 separated the public service deliverable operations into the broadcasting and media solutions and the government enterprise solutions portfolios.  The Radio Signal Distribution programme included the frequency modulation (FM), medium wave (MW) and short wave (SW) products.  The Analogue Television Signal Distribution programme focused on taking over the management and operations of self-help/low power transmitter sites to ensure quality of service and compliance.  Other broadcasting solutions included the Direct-to-Home Satellite Distribution Platform, mobile television and multimedia content management and distribution.  The government and enterprise solution products provided facilities portal services and broadband wireless communications for government departments.  Sentech would continue its strategy of exiting the retail sector of the broadband market.  Details were provided of the broadband connectivity and facilities leasing products.

Sentech’s flagship projects were Digital Terrestrial Television (DTT) and the National Wireless Broadband Network (NWBN).  The DTT project had specific targets and tight deadlines and available resources would be concentrated on the roll-out of the infrastructure network.  Maps illustrated the provincial roll-out of the DTT project and the funding plan for the period 2011/12 to 2014/15 was provided.  The original NWBN business plan submitted in 2008 had been revised but implementation of the plan was subject to funding approval by the National Treasury.

The briefing included the key performance indicators and annual performance targets for the strategic objectives for the period 2012/13 to 2014/15 as well as the detailed quarterly targets for 2012/13

Mr Protas Phili, Chief Financial Officer, Sentech took the Committee through the company’s financial plan for the Medium Term Expenditure Framework (MTEF) period.  Budgeted revenue for the 2012/13 fiscal year was R971.7 million and operating costs totaled R797.1 million.  After-tax earnings for the year were R58.7 million.  The balance sheet indicated the budgeted total asset value of R1.9 billion and total liabilities of R883.5 million.  The cash flow forecast indicated an investment of R689.2 million in property, plant and equipment acquisitions.

Discussion
Ms M Shinn (DA) said that according to the estimates of national expenditure, the Department of Communications would be transferring an amount of R925 million to Sentech in 2012/13.  She asked where government funding was reflected in the financial statements of the company.  She asked for an explanation of “other office costs” as indicated in the list of expenditure items.  She asked for more detail on the “financial and write-off charges” item.  Sentech had indicated that sufficient funding for the dual illumination portion of the DTT project was not available but had expressed confidence that dual illumination would commence in September, as scheduled.  She wanted to know who took the decision to cease analogue broadcasts.  She understood that agreement on the technical specifications for Set-Top Boxes (STB’s) had not been reached and that a period of nine months was required before the boxes could be manufactured.  She asked what the situation concerning the STB’s was.  The briefing omitted mention of the court case regarding the spill-over of broadcasting signals into Botswana.

Ms W Newhoudt-Druchen (ANC) asked what tariffs were paid by commercial radio and television broadcasters and by community broadcasters.  She wanted to know what assistance was provided by Sentech to community broadcasters.  Community radio and television broadcasters were part of the digital migration plan and she wondered what additional costs would be incurred by the broadcasters.  She asked for more details of the broadcasting services to the disabled community and if mobile broadcasting services included providing access to people with disabilities.

Mr B Steyn (DA) observed that Sentech had made input into the National Development Plan (NDP).  However, the NDP had placed little emphasis on ICT despite its priority rating.  ICT was essential for the other development plans.  The policy and regulatory framework under which Sentech operated had not yet been confirmed.  This was a major risk factor for the company’s sustainability and he wanted to know what mitigating measures were in place.  The government funding allocation to Sentech had remained flat.   He asked if Sentech expected this source of funding to reduce and if so, what the impact on the company’s sustainability would be.  The reduced tariff for community broadcasters was welcomed.  He asked if the tariffs for commercial broadcasters had been reduced as well as this sector also suffered in the adverse economic environment.  He noted that the briefing did not include any reference to DTT roll-out in Gauteng.  The DTT target for the percentage population covered was 80% to 86%.  Currently, 92% of the population received television broadcasts and he felt that the Sentech DTT target should at least equal that.  He observed that Sentech’s staff cost had increased by 35% and he wanted to know if the number of employees had been increased as well.  He asked if the tariff revenue collected by Sentech was transferred to the National Treasury.  He noted that Sentech was potentially involved in twelve litigation cases with various entities but would like to see much less court action.  The strategic plan document included much detail on the fraud prevention plan.  A summarised version would be useful and he wondered if employees had been briefed on the plan.

Ms S Tsebe (ANC) asked what changes needed to be made to the Electronic Communications Act (ECA).  She asked which areas would be excluded from the DTT project.  She was concerned that the Northern Cape Province would continue to be deprived of television broadcast coverage.  She asked for more information on the Dinaledi schools project.

Ms Z Ndlazi (ANC) remarked that Sentech’s strategic plan was not easily understood by the majority of the population.  She asked how Sentech decided where infrastructure and services would be provided.

Mr Steyn noted that the payments due to the Development Bank of Southern Africa (DBSA) were not reflected in the liabilities.

The Chairperson said that the Committee had found during oversight visits to the Eastern Cape that residents were unable to receive Xhosa radio broadcasts.  He felt that a national radio signal broadcasting plan was necessary rather than following a piecemeal approach.

Dr Mohapi responded to questions from Members concerning television and radio broadcasts.  He explained that the current problem with the lack of access to FM radio broadcasts was being addressed by the low-power transmitter programme.  Currently 95% of the population was able to receive FM radio broadcasts.  However, the issue of diversity was a bigger challenge.  Sentech and the South African Broadcasting Corporation (SABC) had a common mandate in this regard but the challenge was the ability of the SABC to afford increasing the broadcasts in indigenous languages.  Sentech had submitted a proposal to the SABC on expanding the FM network to certain identified areas.  There appeared to be general acceptance of the proposal by the SABC.  The expansion of radio signal distribution was a long-term, major project and funding would be a challenge.  Sentech had decided to start the process in a limited way during 2012/13.  The low-power transmitter sites had been identified and the Northern Cape was included in the plans to increase coverage.  Consideration was given to maximising the number of beneficiaries for the amount of money spent on providing the services.

Dr Mohapi advised that Sentech had agreed with the SABC to undertake the planning process, which was previously done at the project/technical level.  The entire country would be assessed and the number of inhabitants in each area would be established before a broadcasting services plan was developed.  It was likely that certain remote areas in KwaZulu Natal would lose the current signals when analogue television broadcasts were replaced by digital broadcasts.  The SABC 1 and SABC 2 channels were originally broadcast on VHF.  DTT would be on UHF, which had a shorter range than VHF but offered superior picture quality.  Sentech had asked the DOC to consider making use of satellite broadcasts to ensure that all areas were covered when analogue broadcasts ceased.  Consideration was being given to extend the provision of STB’s beyond the Square Kilometer Array (SKA) area in the Northern Cape.  Sentech would attempt to provide as much coverage as possible from the terrestrial platform.

Dr Mohapi advised that the tariff for commercial broadcasters was reduced by 33%.  The tariff for community broadcasters was reduced by 35%.  Sentech was working with the Independent Communications Authority of South Africa (ICASA) on the implementation of a cost-based tariff model, which had been approved by the Sentech Board.  The bulk of Sentech’s revenue was from the SABC and commercial broadcasters (94%) but community broadcasters made up the bulk of the number of clients.  The tariffs applicable to community broadcasters were relatively high because of high operating costs.  During dual illumination, community broadcasters would receive the same services as the other broadcasters.  He suggested that the Committee referred questions about the STB’s to the DOC.  He was aware that the technical standards had been finalised and that the public participation process was underway.  The closing date for comments was the end of May 2012.  He was confident that Sentech would be able to handle any type of launch of DTT by the DOC.  Sentech had approached civil society and the industry to provide input into the company’s corporate plan.  The matter concerning the signal spill-over into Botswana was extremely complex.  The Judge had not yet provided his reasons for the judgment.  Sentech was appealing the judgment.

Dr Mohapi responded to questions from Members concerning the financial statements.  The budget included a contingency amount for legal fees.  A list of the outstanding litigation cases was provided on page 63 of the strategic plan document.  In most cases, the action required was limited to correcting previous errors.  The Board had appointed a social and ethics committee to provide leadership on fraud prevention and governance.  A Risk Officer had been appointed and was responsible for dealing with all the risk factors identified, including incidents of fraud.

Dr Mohapi explained that the ECA was limited in that the role of Sentech was not clearly specified.  The Act referred to a ‘common carrier’, which does not adequately explain the role played by Sentech.  The DOC had planned a review of the ICT policy, which would clarify Sentech’s mandate.  Until a new policy was implemented the existing White Paper was applicable.  The Provincial Departments of Basic Education had identified the schools under the Dinaledi project.  Sentech worked with the Provincial Departments on the project, which provided free connectivity to the schools.  To date, Sentech had provided infrastructure for schools in Gauteng and the Free State and the programme was being expanded to the other provinces.  All local government authorities should be included in the low-power transmitter programme.  The target for 2012 was 100 transmitters.  Sentech was working with the other stakeholders to determine which area received priority.  Gauteng was already fully covered by the DVB-T2 signal.

Mr Phili explained that Sentech was a Schedule 3 entity had had to be financially sustainable.  Revenue was not transferred to the National Treasury and the organisation does not receive any funding from the State.  There had been an increase in the amounts written off but this was from a very low base.  The write-offs were for obsolete, broken and stolen assets.  Previously, Sentech had used a basic stock-counting process.  An asset verification process had been introduced and the amount of write-offs was expected to increase by 360%.  A basic budget assumption was that cash flow would be three times the payroll.  This was in accordance with the risk management policy and would ensure that staff would be paid.  The budget was prepared during November of the prior year and was based on estimates.  The annual report would reflect actual income and expenditure amounts.  The loan from the DBSA was a long-term loan (see page 76 of the strategic plan document).  The loan of R44 million was payable over more than one year.  The item was reflected in ‘loans and borrowings’.  Provision was made for repayments of R23 million and R21 million respectively.

Ms Shinn asked if Sentech was currently self-sustainable.  She asked for clarity on the funding received from the government.

Mr Steyn understood that the DBSA loan would be fully repaid by the end of 2013/14.  He asked by what percentage the revenue from business opportunities was expected to grow.  He asked if the quarterly KPI targets were cumulative.

Ms Tsebe noted that Sentech was engaging with the DOC on the provision of enhanced services.  She asked what the cost of such services would be.  The Department had informed the Committee of a substantial shortfall in the funding for DTT.  She asked what the impact of the shortfall would be on Sentech.  She asked if a different type of STB would be required for satellite broadcasts.  She noted that the failure to comply with legislation had been identified as a strategic risk.  She asked for an explanation of the provision that had been made for payments to ICASA, to Altech and to Mr Mohammed Siddique Cassim (the previous Chief Financial Officer of Sentech).

Dr Mohapi explained that a different type of STB would not be required for satellite broadcasts.  The second broadcasting channel had to be available during the dual illumination phase of the DTT project.  The government grant was made available for Sentech to cover the cost of providing the additional broadcasting channel.  Most of the R925 million made available was for capital expenditure to provide the necessary infrastructure.  R832 million would be spent on upgrading existing infrastructure and providing new infrastructure.  A list of the capital expenditure projects was provided on page 36 of the strategic plan document.  There were growth opportunities where broadcasters were not yet using Sentech infrastructure.  The income statement only reflected the dual illumination portion.  The quarterly KPI targets for 2012/13 were cumulative.

Dr Mohapi explained that Sentech had attempted to provide universal access in the most cost-effective manner.  The coverage plan was not new and did not require additional costing.  Sentech’s capital expenditure for DTT was fully funded.  The dual illumination phase was fully funded for years two and three of the MTEF period but there was a shortfall for the first year.  Sentech had provided data to the DOC on the number of inhabitants of the SKA area that would lose television broadcast coverage.  These persons should qualify for the STB subsidies.

Mr Phili explained that provision had been made in case Sentech lost the court cases.  The provision was made on the advice of the company’s legal adviser.

Ms Shinn asked for details of the R84 million claimed by ICASA.

Dr Mohapi explained that the matter dated from 1997.  The amount referred to the contingent liability.  Negotiations were under way to get the matter resolved.  Sentech had found that the failure to comply with ICASA regulations was costly.  The matter involving Altech had been resolved.  The case arose when certain executive managers had exceeded their authority.  The managers concerned had since left the company.  The matter concerning Mr Cassim was still underway.  A case had been opened in the CCMA and the Labour Court and his response to the company’s defence was currently awaited.

The Chairperson asked for actual quarterly targets to be reflected as this would assist Members in assessing performance.

Ms Newhoudt-Druchen asked for a written explanation of the targets set for the open access content distribution platforms (see page 66 of the briefing document).

The Chairperson observed that ICASA also needed to be on board for the low-power transmitter programme.

Dr Mohapi agreed that ICASA played a role in addition to the SABC.

The Chairperson welcomed the new Sentech directors, who had attended the proceedings.  He asked if Sentech required government funding and wondered if the company was prepared to fund its social obligation from own resources.

Mr Mashile declined to comment.  He thanked the Committee for its support and gave the assurance of Sentech’s readiness to deliver on its mandate.  The company was ready to meet the challenges of rapid technological advancement, the digital era and the advent of mobile devices capable of transferring content that could no longer be controlled by broadcasters.

The Chairperson thanked the representatives from Sentech and the Members of the Committee for their participation in the briefing.

The meeting was adjourned.