Broadband Infraco (BBI) rescue funding, with Deputy Minister

Telecommunications and Postal Services

22 September 2015
Chairperson: Ms M Kubayi (ANC)
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Meeting Summary

The Committee met for briefings by Broadband Infraco (BBI), National Treasury and the Department of Telecommunications and Postal Services (DTPS). The Deputy Minister in her opening remarks highlighted that the Minister had tabled the position of the Department, and this was that the BBI is part of the league of entities that had been given to the Department to achieve its mandate, which was to modernise the economy, particularly economic infrastructure, rollout of broadband and facilitation of e-Governance and e-Services and deal with cyber security.The Department was still committed to preserving the asset value of BBI and there are concerns about the technical capacities and human resource capacity, mainly people who are within the entity. 

The Department indicated that the historical losses, undercapitalisation and obsolete network infrastructure, had resulted in BBI requiring additional equity contributions. Over time since 2012, BBI had made Medium Term Expenditure Framework (MTEF) and short term guarantee applications to government and these exercises had been unsuccessful. The guarantee applications had been unsuccessful due to a number of reasons and these included lack of a sound business case presented, investment which would significantly increase the company’s debt levels whilst decreasing its ability to service debt and thus resulting in significant deterioration in BBI’s liquidity position, indication of loss making losses for the projected period; and indication of government subsidising commercial contracts undertaken by BBI.

The Cabinet had already approved the appointment of the Chief Financial Officer (CFO) for BBI and the immediate problem was the preservation of value and the address of cash flow problems. Both shareholders share a common view that BBI required capitalization in order to preserve its value for both shareholders. The Industrial Development Corporation IDC is considering providing BBI with a guarantee facility of R286 million (this amount included a contingency of R43 million) over the next two years. The Department in consultation with National Treasury was exploring the following avenues in an effort to secure funding for BBI: Guarantee Application facility; and MTEF application process. BBI had made an MTEF application of R1.7billion to the Department and the Department had submitted the MTEF application to Treasury. The outcome of the discussions with Treasury was that given the rationalisation process, it was critical to consider a guarantee of R243 million for going concern purposes.

National Treasury forecast that the cost of sales at BBI was to increase by 106.6% to R316 million after contracting by 11% to R153 million in the prior year. The spike is mainly due to additional costs attracted by the new contracts concluded with SITA and Cell C. Operating expenses (OPEX) are expected to increase by 3.2% to R331 million (2014: R312 million). The key drivers are depreciation costs and employee costs which jointly contribute 76%. BBI had posted its highest loss to date of R268 million in 2014/15, an 87% increase from the prior year loss of R143 million. BBI had submitted a five year funding request which was not congruent with its two year rationalisation process. After revising their request in line with the MTEF framework, the request had totalled R932 million over the 2017/18 and 18/19 financial years. The request would be evaluated against other funding requests that had been received. Treasury made it clear that the rationalisation process needed to be expedited and it advised that a steering committee should be set up between the relevant departments and that a transaction advisor should be appointed to evaluate different options for rationalising BBI.

BBI stated that an MTEF application in support of the BBI Capital Asset Renewal and Fixed Capital Formation programmes for value R1.8 billion over the medium term expenditure framework had been submitted to DTPS. A Universal Service and Access Fund (USAF) subsidy application to cater for the Universal Access capital investment expenditure requirements was submitted before the end of April 2015. The DBSA had advised that the State Information Technology Agency (SITA) business case is undergoing governance processes, the first of which is a presentation to the Business Development Committee. The African Development Bank Group (AfDB) had been provided with the pre-investment report. The Bank will await the RSA stakeholder governance processes before conducting a due diligence for fundability of the projects and the application has been approved by the Executive Council (EXCO) and submitted to the Universal Service Access Agency of South Africa (USAASA).

Members wanted to know about the progress that had been made on the USAF subsidy application to cater for the Universal Access capital investment expenditure requirements which had been submitted before the end of April. It was unclear what justified the escalation of the employee cost above inflation each and every year, since BBI had not been making any money for the past five years. What was the likelihood of BBI to go for business rescue? Some Members asked if there was a stage where the Committee would be provided with the assessment of the quantified assets value of BBI, as it was not helpful to inject funding to an entity where the assets value had been deteriorating. Members indicated that the appointment of the CFO for BBI was not helpful at this stage as it was clear that the entity would eventually be rationalised.The financial analysis that had been provided by Treasury spoke of poor management and the escalation of employee costs above inflation did not make any sense.

Members expressed a concern that Treasury had advised BBI to reduce its capital expenditure but BBI continued to enter into various contracts, with its management being aware that BBI did not have sufficient funding to provide for the upfront capital outlay required. It was surprising that the Department was still talking about the three year plan of State Owned Enterprises (SOEs) rationalisation as the Committee had rejected that plan as it was impossible for the Department to talk about a three-year plan for SOEs’ rationalisation while the majority of the entities were in trouble at the moment. It was disappointing that there seemed to be lack of coherence in the Department as the Executive and its entities needed to speak in one voice. The SOEs’ rationalisation needed to take into cognisance the current reality of BBI, South African Post Office (SAPO), SITA and Sentech.   

Meeting report

Chairperson’s opening remarks
The Chairperson noted that the Committee had been alerted that Broadband Infraco (BBI) would face difficulty in terms of sustainability as it had not received any response from National Treasury on the application for guarantee. The indication was that BBI would not be able to survive by 30 September 2015 because of lack of cash flow that would only run until the end of September. The Committee should not have passed the BBI budget during the budget vote in terms of the requirements and this was only done in the understanding that the Department of Telecommunications (DTPS) together with BBI would come back to the Committee and give an indication on the progress that had been made regarding the future of BBI. It was clear that the Committee had approved an unfunded mandate and one of the reasons for calling in National Treasury was to understand where the problem was and the way forward.

The Chairperson added that it would be irresponsible for the Department not to resolve the current problem at BBI as there were state assets in the entity plus people who employed by the state and who are facing uncertainty about their future. Parliament had the responsibility to review the status of BBI and how government was intending to deal with the situation at the moment. It would be impossible for the Committee to deal with the Budget Review and Recommendations Report (BRRR) without having had an opportunity to get clarity on the future of BBI. The Presiding Officer had made it clear that Parliament needed to be provided with clarity on the matter as it could not be left hanging as it is at the current moment.

Deputy Minister’s opening remarks
Prof Hlengiwe Mkhize, Deputy Minister of Telecommunications and Postal Services, said that the Department was equally concerned about the current situation at BBI. The Minister had tabled the position of the Department, and this was that the BBI is part of the league of entities that had been given to the Department to achieve its mandate, which was to modernise the economy, particularly economic infrastructure, rollout of broadband and facilitation of e-Governance and e-Services and deal with cyber security. The Department remained committed to this mandate and it was pleasing to see that Industrial Development Corporation (IDC) was backing the Department in assisting with the status of BBI. There are on-going discussions with Treasury and the Department fully agreed that there was indeed no clarity on the location of BBI in the last presentation. The Department was still committed to preserve the asset value of BBI and there are concerns about the technical capacities and human resource capacity, mainly people who are within the entity. 

Mr Joe Mjwara, Acting Director General of DTPS, mentioned that the presentation by the Department would cover the government approach to BBI and its contribution going into the future and BBI’s request for funding, the hurdles to BBI funding and the essence of the discussions on funding. The Department would talk about the approach to funding and the guarantees that had been sought. The presentation by Treasury would focus on the historical view of BBI and why BBI was conceived in the first place and the funding issues at the moment. BBI would focus on the status of funding and the funding initiatives that had been sought within and outside the state.      

Department of Telecommunications and Postal Services briefing on Broadband Infraco
Mr Sibongile Makopi, DDG: Shareholder Oversight, DTPS, indicated that over the years, government came to realise that the current market structure is inefficient, costly, duplicates infrastructure in urban areas and cannot roll-out Information Communication and Technology (ICT) infrastructure and services to reach all South Africans in line with the long term vision of a connected society. A decision was taken to put together Telkom, Sentech, South African Post Office (SAPO), State Information Technology Agency (SITA) and Broadband Infraco (BBI) into the new Department to enable rationalisation and fast track achievement of the National Development Plan (NDP) goals.

This meant all those ICT State Owned Companies (SOCs) are under a single department to achieve greater coordination and efficiency. As a result in 2014, the President made a proclamation to transfer BBI from the Department of Public Enterprises (DPE) to the newly formed DTPS to accelerate broadband rollout.  Since its inception in 2007, BBI only received start-up shareholder support over the period 2008 to 2011. During this period BBI received a shareholder loan amount of R1 840 000 000 comprising of: R1 361 600 000 directly from government (as the 74% shareholder in BBI and R478 400 000 from the IDC, which holds 26% shareholding in BBI.

Mr Makopi said that historical losses, undercapitalisation and obsolete network infrastructure, have resulted in BBI requiring additional equity contributions. Over time since 2012, BBI has made Medium Term Expenditure Framework (MTEF) and guarantee applications to government and has been unsuccessful due to a number of reasons. Some of the reasons as stated by National Treasury relate to a lack of sound business cases presented: Investment which will significantly increase the company’s debt levels whilst decreasing its ability to service debt and thus resulting in significant deterioration in BBI’s liquidity position; Indication of loss making losses for the projected period; and Indication of government subsidising commercial contracts undertaken by BBI. The DTPS held several engagements with the company to determine the root cause of BBI’s funding challenges and amongst others, the Department made the following observations:
- BBI did not have a Chief Financial Officer (CFO) for a long time
- BBI cost of sales has been higher than revenue generated
- BBI is currently involved in the litigation battles with its major customer (Neotel) which represented almost 80% of its revenue
- BBI was advised to revise its applications and submit proper business cases for each of the capital expenditure categories particularly a business case relating to commercial contracts with a caution of what seemed to be providing indirect subsidies to commercial players under the guise of lowering the cost to communication.
- As such BBI was advised to structure its submissions around the implementation of SA Connect and the imminent rationalisation process

Mr Makopi highlighted that to date BBI has not been able to secure any funding or equity injection from its shareholders and it has been running its business operations from its depleting cash flow which had an impact on its current weak balance sheet. This has had an adverse impact on the company and its business models which may yield to unintended consequences for both the company and the shareholders. BBI is faced with cash-flow problems. Two processes are underway to address the going concern issue as a result of cash flow problems. Government is dealing with the matter through the Treasury request for a guarantee. The second process is through the IDC and government was to write to Parliament to request permission for the delayed submission of the Annual Financial Report. The rationalisation process thus far considered all SOCs that will play a key role in the rollout of broadband and also explored different options to realise the rationalisation objectives. The Department is currently working towards completing the rationalisation roadmap which will form part of National Broadband Network. The Department notes that BBI holds strategic assets which need to be harnessed for purposes of implementing broadband roll-out in South Africa.

The Cabinet has already approved the appointment of the CFO and the immediate problem is the preservation of value and the addressing of cash flow problems. Both shareholders share a common view that BBI requires capitalization in order to preserve its value for both shareholders. IDC is considering providing BBI with a guarantee facility of R286 million (this amount includes a contingency of R43 million) over the next two years. The Department in consultation with Treasury is exploring the following avenues in an effort to secure funding for BBI: Guarantee Application facility; and MTEF application process. BBI made an MTEF application of R1.7 billion to the Department and the Department submitted the MTEF application to Treasury. The outcomes of the discussions with Treasury were that given the rationalisation process, it is critical to consider a guarantee of R243 million for going concern purposes.

National Treasury (NT) briefing on Broadband Infraco
Ms Othella Groenewald, Director: Energy and Telecommunications, NT, mentioned that BBI has struggled to remain relevant since, plagued by a lack of client/revenue diversification (Neotel being its main client for a number of years), poor network reliability, and limited network presence, given that the private sector already has networks in the golden triangle (Gauteng, Durban and Cape town). BBI is currently struggling to compete because of its lack of aggregation and access fibre, which places it at a disadvantage to competitors. Furthermore, there are private sector players who are able to offer access to and build open access networks. As part of the ICT Policy Review, the DTPS analysed the mandates of all ICT entities with the aim of repositioning and rationalising entities to eliminate inefficiencies and avoid duplication of mandates and resources. BBI was identified as one of the entities to be rationalised and the exact process is yet to be detailed. It would be advisable that a steering committee be established between the relevant departments and that a transaction advisor is appointed in order to expedite the rationalisation process.

Ms Groenewald mentioned that R140 million was made in the 2010/11 financial year and BBI was expected to operate on a commercial basis. During the 2014 budget process, BBI’s bid was dismissed. A policy decision had already been taken to rationalise the entities in the sector. In the constrained fiscal environment, delays in this process requiring that funds be allocated to companies like BBI would not be tolerated. BBI has submitted a funding application for the Medium Term Expenditure Framework (MTEF) 2015. BBI submitted a five year funding request which is not congruent with its two year rationalisation process. After revising their request in line with the MTEF framework, the request totalled R932 million over the 2017/18 and 18/19 financial years. The request will be evaluated against other funding requests received.

National Treasury has met with BBI and its auditors regarding the going concern requirement. The application will be reviewed. It will be assessed against the ability of BBI to repay any debt raised against the requested guarantee, the broader strategic decision on the rationalisation of BBI and the risk posed to the fiscus. Treasury has on numerous occasions advised BBI that it should reduce its capital expenditure. However, BBI proceeded to enter into various contracts, with its management being aware that BBI did not have sufficient funding to provide for the upfront capital outlay required. This is also as a result of BBI not having scale in terms of the aggregation/access fibre, making it very costly for BBI to service these new clients.

Mr Thuthuka Ngubane, Energy and Telecommunications Accountant, National Treasury, said that revenue has shown an immaterial compounded annual growth rate (CAGR) in the five year historic period to 2013/14 of -0.26%. This was largely due to the over-dependency on one major client. Cost of sales has shown a contracted CAGR over a five year historic period of -8.2% mainly due to the high fixed cost structure of the service provided. Operating expenditure has shown a substantial CAGR over a five year historic period of 12.6%, mainly due to employee expenses which increased above inflation year-on-year. BBI initially made a profit in 2007/08 its first year of operation and as it matured it has incurred losses every year thereafter. BBI recorded a net loss of R143 million for the 2013/14 financial year. This is mainly due to a higher increase in costs than revenue year-on-year. BBI has not revised its tariffs since its initial filing with the Independent Communications Authority of South Africa (ICASA) in October 2010. However, the costs of providing the services have increased substantially from 2010 to date. This has led to a mismatch and resulted in the inability to recover the costs of providing services with the revenue generated. The current ratio has been deteriorating indicating the entity’s inability to meet their debt as it becomes due.

Mr Ngubane added that revenues are projected to increase by 20% to R364 million (2014: R302 million) mainly attributable to the addition of two new major clients, SITA and Cell C. Neotel is still the chief contributor to revenue although its contribution is expected to go down from 62% to 42% and together these major clients are anticipated to contribute approximately 80% of the total revenue. Cost of sales is forecast to increase by 106.6% to R316 million after contracting by 11% to R153 million in the prior year. The spike is mainly due to additional costs attracted by the new contracts concluded with SITA and Cell C. Operating expenses (OPEX) are expected to increase by 3.2% to R331 million (2014: R312 million). The key drivers are depreciation costs and employee costs which jointly contribute 76%. BBI posted its highest loss to date of R268 million in 2014/15, an 87% increase from the prior year loss of R143 million. This is mainly attributable to a significant increase in the cost of sales which doubled when compared to the prior year.

Ms Groenewald concluded that at the time of establishing BBI, there was a market gap that needed to be addressed as a result of the market dominance of the Telkom monopoly. However due to delays in licensing BBI and policy shifts (self-provisioning) moving the sector from one that is based on infrastructure competition to competition based on services, the strategic requirement for BBI is no longer as relevant. South Africa Connect is the policy framework that will guide the roll out of broadband throughout the country. In line with SA Connect, the Ministry of Telecommunications and Postal Services (MTPS) has advised BBI that it will be rationalised within two years. BBI has made losses for the past five years and will continue to do so for the forecast period. Although the entity advises that it will make net profits in the medium term, this is uncertain at this stage. The rationalisation process needs to be expedited. It is advisable that a steering committee be set up between the relevant departments and that a transaction advisor is appointed to evaluate different options for rationalising BBI.

Broadband Infraco briefing
Ms Puleng Kwele, BBI Chief Executive Officer, stated that on 10 June 2015, there were discussions on the revised corporate plan and an indication that R243 million cash injection will be required by BBI and the external auditors have to be engaged about verification of the cash shortfall. There were further engagements on 08 July 2015 on the guarantee application with external auditors and there was a request for written notification from the auditors and National Treasury requested further information and made inputs. The IDC Credit Committee convened on 15 September 2015 and recommended to the Board Investment Committee and there was a conclusion that the IDC Board Investment Committee will convene on 28/30 September 2015.

Ms Kwele said that the strategic plan of March 2015 showed that a R3.5 billion MTEF application was submitted to the DPE. Applications were considered by the Fiscal and Liability Committee of National Treasury and funds have not been allocated. The R170 million short term guarantee and R528 million medium term guarantees were submitted to the Executive Authority in mid-October 2014 and these applications were not successful. In August 2015, a guarantee for R243 million was submitted to both shareholders – this process is at approval stages with both shareholders. An MTEF application in support of the BBI Capital Asset Renewal and Fixed Capital Formation programmes for a value R1.8 billion over the Medium Term Expenditure Framework has been submitted to DTPS. A Universal Service and Access Fund (USAF) subsidy application to cater for the Universal Access capital investment expenditure requirements was submitted before the end of April. The DBSA has advised that the SITA business case is undergoing governance processes, the first of which is a presentation to the Business Development Committee.

In conclusion, the African Development Bank Group (AfDB) has been provided with the pre-investment report. The Bank will await the RSA stakeholder governance processes before conducting a due diligence for fundability of the projects and the application has been approved by EXCO and submitted to the Universal Service Access Agency of South Africa (USAASA).

Discussion
Mr C Mackenzie (DA) welcomed the presentation and said that the presentation had made it clear that BBI had not been generating profit since its inception and the addition of the new customer was perhaps the only hope for the sustainability of BBI. What was the other consideration that was likely to affect Treasury’s decision to fund BBI? It looked like USAF was the right kind of funding that was required by BBI as the entity was meeting its mandate of servicing the underserved areas. In terms of litigation with Neotel, it would be important for the Committee to know about the disputable amount and the likelihood of arriving at a settlement with Neotel.

Mr Mackenzie asked about the progress made on the USAF subsidy application to cater for the Universal Access capital investment expenditure requirements which was submitted before the end of April. It was unclear what justified the escalation of the employee cost above inflation each and every year, since BBI had not been making any money for the past five years. The financial constraints in the country had worsened and it was clear that the chances of receiving funding were a lot less.

Ms J Kilian (ANC) indicated that the presentations made today painted a very gloomy picture of the future of BBI and the Committee needed not to “beat around the bush” on the possible future of BBI. The fact that BBI could not increase its tariffs to customers as this was part of the agreement that had been reached meant that BBI was actually set up for failure. What was the likelihood of BBI going for business rescue? She asked if there was a stage where the Committee would be provided with the assessment of the quantified assets value of BBI, as it was not helpful to inject funding into an entity where the assets value had been deteriorating. It was not helpful for BBI to be appointing a CFO when it was clear that the entity would eventually be rationalised. What could the government do to rescue BBI without incurring additional costs, which may become fruitless and wasteful expenditure? The financial analysis that had been provided by Treasury spoke of poor management and the escalation of the employee cost above inflation that did not make any sense.

Ms L Maseko (ANC) expressed a concern that Treasury had advised BBI to reduce its capital expenditure but BBI continued to enter into various contracts, with its management being aware that BBI did not have sufficient funding to provide for the upfront capital outlay required. BBI needed to be upfront and admit that there are problems within the entity, as it was irresponsible to enter into new contracts while still struggling to service debts. The appointment of the CFO at this time was a major concern as the salary of the CFOs was not peanuts and BBI had a deficit budget.

Ms D Tsotetsi (ANC) asked if BBI was able to evaluate and assess its risk management.

The Chairperson said that the financial state of BBI had been like this for the past five years and therefore it would be important to know the interventions that had been taken by Treasury in order to assist the entity. She asked about the proposals that had been made if the guarantees for BBI are not approved as this was the main part that was missing in the presentation. The understanding was that there was a need to preserve the value of the assets of BBI.  It was clear that the Department was aiming to avoid a situation where BBI would be given an adverse opinion as this would result in the depreciation of the assets. The Department together with Treasury had been reckless in the management of state assets as the problem started before BBI was even transferred from the DPE to DTPS. Treasury knew that there was a problem in BBI but failed to act promptly to avoid the possibility of the devaluation of state assets. What had been the engagements between Treasury and BBI? How was Treasury protecting the assets of the state?

The Chairperson appreciated that the Department saw the importance of having a CFO as the Department itself had not had a CFO for three years. It was evident that the problem of financial mismanagement emanated from the Department as it was the Department that oversees its entities. It was surprising that the Department was still talking about the three year plan of SOEs’ rationalisation as the Committee had rejected that plan as it was impossible for the Department to talk about the SOEs rationalisation that would take up to three years while the majority of the entities are in trouble at the moment. It was disappointing that there seemed to be lack of coherence in the Department as the Executive and its entities needed to speak in one voice. The SOEs’ rationalisation needed to take into cognisance the reality of BBI, SAPO, SITA and Sentech. The whole team needed to go back to the drawing board to resolve the matter of BBI as what had been presented to the Committee said nothing about the crux of the matter, especially on what was to happen to BBI after 31 December 2015. The ANC government could not be reckless about the lives of the people that are involved in BBI and it was inhumane for the Department to be prioritising endless meetings while the future of employees was hanging in the balance.

The Chairperson asked about the views of the Board on the matter of BBI as this was important for the Committee. The Committee could have easily amended the budget of the Department and then allocated funding to BBI. The Committee had been frank that it would not dictate to government on the steps to be taken regarding BBI but this did not mean the Committee would allow any reckless direction to be taken. It was unclear why Treasury suggested that there should be a steering committee to expedite the rationalisation process while it was clear that the rationalisation process could take about three months. She hoped that the Department would not be talking about SOEs’ rationalisation again as this was utterly rejected by the Committee.

Mr Mjwara, DTPS Director General, responded that there is already a process underway on the way forward regarding the future of BBI. The Department needed to have a clear view on the assets of all its SOEs and this process had already been completed and the priority was now on building a business case on the assets that would be needed and that would be merged or integrated and the decision to be taken post the integration of those entities. There should be an understanding that BBI is still an entity with no business case for its existence going into the future and therefore the Department needed to determine its business case going into the future within that integration. DTPS still needed to develop a plan on the assets of BBI and the action to be taken on those assets that are clearly running parallel to the assets of other SOEs and this was the part, under normal circumstances, that would be falling under the implementation part. Hpwever, the Department had pulled it upfront so as to be clear on the direction to be taken when discussing modalities of integration. The third aspect of the work was to deal with policies around the open access network as this had not been concluded since the national broadband network needed to respond to the policy imperatives that are there.

Mr Mjwara added that the future of BBI was on top of the agenda of the Department at the moment and it was indeed correct that waiting for the three year plan was too long for rescuing BBI and this was the plan that the Department decided against choosing. The plans that had been presented today focused on the preservation of value and the ability of BBI, currently, to meet its commitments and there is consideration in terms of the guarantee to be given to BBI. The Department has been working very closely with Treasury on the guarantee and there is hope that the guarantee will be issued by Treasury as the commitments had already been made. BBI’s capability in terms of meeting the commitments is just not there and the entity needed government’s consideration in order to be rescued. The Department was considering two options to solve the predicament of BBI and the first one was use the guarantee that had been requested for BBI to raise cash in the market in order for the infusion of cash into their operations. The second option was related to the question of the MTEF, and the Department was considering these options with the aim to reach a conclusion before the end of 2015.

Mr Mjwara wanted to make it clear that if BBI is to be left alone, the entity will then be compelled to take the path of a business rescue operation,. It must be recalled that BBI initially said it would run out of cash by March 2015 and the Department together with BBI undertook a number of interventions to cut down costs hence the date of closing shop was extended to 31 December. The Department was aware of the seriousness of the matter of BBI as it was impossible for BBI to operate without cash injection and the two shareholders of BBI have committed to assisting the entity to move from its current state. The process to recruit the CFO for the Department was well advanced and the Minister will be reporting on the matter in due course.

Mr Makopi responded that a business rescue was one of the menus of options to be considered in situations like that of BBI, but it must be taken into consideration that the business rescue on its own had its demands, like the funding of the business rescue itself. It was clear that the main problem of BBI has been identified and this was financial injection and the one of the determinants of the success of a business rescue was financial injection. It was indeed correct that the Department also needed to appoint its own CFO to deal with its financials. The late appointment of the CFO for BBI was to ensure that the entity had someone who was competent to deal with financial matters and this was closely related to the whole endeavour to assist BBI and the appointment of the CFO now had bigger benefits. The Department has been working closely with the integration of all entities and this required financial diligence and proper financial management. The Department needed to be aware of the financial and legal impact of various contracts that BBI has entered into. The three year plan for SOEs rationalisation referred to the broad timeframe in which the process could be completed and the Department would go back and relook at the time-frame that had been stipulated in order to promptly deal with entities that were in financial difficulty.

Ms Groenewald responded that Treasury fully supports the rationalisation process taking place as soon as possible and one of the hardships in making funding allocations has been the overhanging policy issue that comes from the ICT policy review which is the SOEs rationalisation. Treasury was still expecting a concrete plan that sets out a timeframe for the rationalisation of SOEs as Treasury does not have a clear understanding of the asset value that was to be preserved. It must be pointed out that BBI does not only have a developmental mandate but serves developmental and commercial interests so Treasury would certainly expect that BBI would be having returns on equity for the value that has been invested on the entity. BBI has been mostly performing commercial business versus developmental business and this was not the kind of financial position to be expected when undertaking commercial business - and this was the issue that often comes into play when making a funding allocation. Treasury has recently received the guarantee application and no decision has been taken by the Fiscal Liability Committee (FLC) and it was up to the Minister of Finance to provide the final outcome of the guarantee. 

Mr Ngubane replied that the recommendation that has been made by Treasury was that there was no business case for BBI and therefore there was no justification to enter into various contracts until a clear role for the entity has been crafted. The net asset value of BBI is currently worth R500 million and BBI will need financial expertise in order to preserve this net asset value.

Mr Mandla Ngcobo, BBI Board Chairperson, responded that the Board is constrained by regulations not to go through business rescue as it was only the shareholder that was allowed to commence that action. The Board had already informed the Minister that perhaps business rescue was the better option to solve the problem of lack of capital injection in BBI. It must be emphasised that the current Board at BBI started in 2012 and this was an entity that had never managed to get an unqualified audit. However, there has not been any qualified audit at BBI for three years in succession. The Board has done its best to bring the entity to its feet and the paradox for BBI was the entity was given an unfunded business plan to do social obligations. The reason the Board decided to do a hybrid of commercial and developmental business was precisely to subsidise what the Department and Treasury had failed to subsidise. BBI was only conceived in 2010 and there was no infrastructure telecommunication company in the last 25 years that has managed to generate income in its first five-year span.

Mr Ngcobo added that the Board has shown that BBI was capable of being profitable next year given enough funding to operate. It must be highlighted that when the new Board started in 2012, there was a large number of employees at BBI and through natural attrition, a simple scaling down of the number of employees has been done. The Board has initiated a strategy that said there was a need to substitute Neotel as a single customer and this was done through doing business with other SOEs and started collaboration with SITA and Sentech. There was a sub-committee with the Minister and the Board came up with these interventions and the business agreement of SITA for up to three years was very profitable. He disputed that the net asset value of BBI was R500 million as the correct figure was R1.7 billion and if BBI was to convert its shareholder alone, then this could be sold at nothing less than R3-4 billion.

Ms Kwele responded that BBI has submitted a Universal Services Fund (USF) application focusing on Limpopo simply because this was the province that BBI has been working closely with, and there has not been any response so far. BBI was expecting the arbitrator to give the final ruling on the Neotel issue by the end of this month and the Committee will be provided with formal correspondence on the final verdict. The tariff that was initially lodged with the regulator was the market related tariff and there was no costing work done. There were only the going prices of the market and these were then discounted. Members needed to be aware that prices have been going down and the Executive Committee has worked on the costing exercises. It was difficult to determine what informed the pricing to Neotel as these were prices that were offered from 2007-2012 and these were prices that were offered at that time with an escalation of capacity. It must be noted that 80% of BBI transmission equipment was obsolete and 50% of the projects that the entity was running needed 50% of that transmission and 3 000km of fibre out of the 14 000 was obsolete and therefore BBI needed to connect the customers in order to refurbish the network.

Ms Kwele added that BBI has informed its employees that things need to be done differently, especially in the reduction of labour costs, although still aware that the revenue ratio was below 29% which is not a comfortable place to be in. BBI was expecting a direction on the funding that was required and the priority at the moment was on the preservation of the assets and the security of employment of those working for BBI. The Board would review the current status of BBI at the end of the current quarter and then engage organised labour accordingly. The Board was reviewing and assessing the risks of BBI on a quarterly basis and the focus at the moment was on the upgrading of the networks.

Prof Mkhize appreciated the frustration of Members regarding the slow pace in dealing with the challenges of BBI especially the issue of capital injection. The Department insisted on BBI having a CFO because there were difficulties in getting a realistic business model, mainly the operations which are costed accurately and this was a creating a deadlock which it made it difficult to move for BBI. The priority of the Department is for its entities to fast-track the rollout of broadband and the discussions on the future of BBI should indeed be expedited so that broadband could be delivered timeously. There is generally the feeling that BBI has an important role to play in the rollout of broadband and there is commitment to working hard to ensure that the value of the assets of BBI is not depreciated. The technical skills that had been acquired by the entity over the years are crucially important in the rollout of broadband in the country.

Mr Ngubane responded that the net asset value that was preserved from the documentation received from BBI as at 30 April 2015 was R1.3 billion and liabilities of R800 million making the net asset value of the entity R500 million. It must be highlighted that Treasury has not performed an independent valuation in terms of the valuation of BBI.

Mr Mackenzie expressed disappointing that the conversation today did not speak about the way in which the Department was willing to make BBI profitable again and the changes in the business model that would generate profit in the foreseeable future.

Ms Kilian said that although it was good to hear that BBI tried to diversify its customer base, it was confusing that the entity now relied upon SITA for profitability as this was the same entity that was involved in the turnaround strategy. There is a general sense that the Chairperson of BBI was very sensitive to the comments that had been made by Members and this was not the right attitude in solving the problem of BBI. Members were public representatives and they had a responsibility to oversee all organs of state and all the SOEs fell under this category. It was difficult to sympathise with an institution that was warned by Treasury not to enter into various contracts but continued to do otherwise.

Ms Tsotetsi hoped that the CFO appointed would not be resigning within the next six months given the financial situation at BBI and it was unclear if the current budget would be able to sustain the CFO. It was disappointing to hear that there were no consequences for whoever was supposed to implement Treasury’s advice not to enter into various contracts. The minutes of today should be kept for future reference on the commitments to be made.

Mr Ngcobo apologised if he sounded so sensitive to the comments that had been made by Members as his point was merely to highlight the role that has been played by the Board since 2012. He disputed that there was ever a Treasury instruction for BBI not to enter into various contracts and this could be checked in the minutes of those meetings.

Ms Kwele responded that a proper costing analysis is done by BBI on the services offered for Vodacom, Cell C and SITA and therefore it was incorrect to assume that BBI was continuing to sell services below cost. The challenge at the moment was on the recovery of the accumulated losses for the first five years. It was indeed correct that in totality, the cost of sales is above the revenue and the entity was intending to use the contracts to upgrade the networks. The pricing of BBI has been reviewed and the Board was comfortable with governance that has been put in place and the focus was on the management of cost of sales. There is also a focus on driving the revenues as there is an infrastructure that is sitting there and the kilometres of fibre that has been added was minuscule compared to what was happening within the sector.

Ms Kwele responded that BBI has been upgrading the transmission equipment which enables the entity to upgrade the capacity on the networks. The customers are willing to come to the network because BBI is able to meet the Service Level Agreement (SLA) and upgraded the critical aspects of the network. There was no doubt that BBI would get an adverse audit opinion unless it could be given funding for the going concern which covers at least 18 months. There is clarity that there is rationalisation that needed to happen and the contract for the CFO was a two year contract rather than the five year contract that the Executive normally signed.

The Chairperson indicated that it was clear that there should be an engagement between the National Treasury, BBI and the Department so as to provide the Committee with a report that would be comprehensive. It was concerning that the Department had stated that the annual report of BBI would not be submitted on time as the Committee had hoped to take today’s discussions to the BRRR.

Mr Mackenzie asked if the revenue of BBI in the last financial year had exceeded the costs and if BBI was likely to be profitable based on the contracts that had been signed.

Ms Kwele responded that for every single customer that BBI has connected, that deal was profitable and because BBI was a fixed infrastructure player therefore there has been an accumulation of cost. The R1.8 that has been spent on the company has been sitting there and was provided to the company until the year 2011-12. BBI was currently trying to recover all of those specific losses since 2012. In essence, the new contracts that had been acquired did not mean that would assist BBI to move from the current situation.

The Chairperson indicated that the Committee would need to make a slot for a follow up meeting on the matter so as to get clarity on the way forward for BBI. The date for the follow up meeting would be communicated to the entities and the general public.  

Committee Programme
The Chairperson said that the BRR committee meetings would be slotted for Tuesdays and the Committee would meet on 15 October with a briefing by the Auditor-General (AG), followed by the DTPS, SITA and .ZA Domain Name Authority (zaDNA). The Committee will again meet on 16 October and these meetings would be a strain for Members as they would likely to be concluded between 20:00 to 21:00 in order for the work to be completed.

Mr Mackenzie asked who would present on the spectrum policy on 27 October.

The Chairperson responded that it would be the DTPS and ICASA.

Mr Mackenzie asked if it was perhaps possible to invite Neotel and MTN to the meeting that is scheduled for 3 November to deal with broadband rollout.

The Chairperson responded that the intention was to firstly hear the plan of government on broadband rollout before engaging with the entities responsible for broadband rollout. It was still difficult to see how the Department was planning to rollout broadband and this needed to be cleared up. She suggested that the Committee needed to have a public hearing on compliance of Broad-Based Black Economic Empowerment (BBBEE) and Small Medium Micro Enterprises (SMMEs) that had not been met by the sector so as to hear the inputs of various entities. The DTPS was supposed to have established a Council that would be mandated to undertake monitoring to ensure that the Charter is being consistently enforced, but failed to do so. The failure to establish a Council was likely to discourage investment in the sector and this was something that needed to be avoided by all means.

The House Chairperson was proposing that the Committee have a joint oversight visit with the Portfolio Committee on Basic Education on schools connectivity in Eastern Cape. The Committee had observed during the oversight visit in Limpopo last week that the problem was not only on the cost to communicate but also the quality of the service that is provided and therefore the proposed programme should be in line with this observation.

Ms Kilian supported the suggestion to have a joint oversight visit with the Portfolio Committee on Basic Education but cautioned that the Committee needed to be aware if Members would not be called back to Parliament for urgent legislation while already incurred some expenditure on booking and travelling.

The Chairperson responded that the lack of stability of programme of Parliament was impacting vastly on committee work and therefore the Committee needed to closely monitor the programme of Parliament so as to be aligned to any changes effected.

The Committee Programme was adopted with amendments.

The Chairperson requested Members to adopt the minutes of 8 September 2015.

Adoption of minutes
The minutes of the 8 September meeting were adopted with amendments.

Committee Report on ICT Seminar
The Committee Report on ICT Seminar was adopted with amendments.

The meeting was adjourned.

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