Sentech on its 2016 Strategic & Annual Performance Plan

Telecommunications and Postal Services

14 April 2016
Chairperson: Ms M Kubayi (ANC)
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Meeting Summary

Sentech presented its strategic plan and annual performance plan for 2016 - 2017. Officials from Sentech pointed out that the sector was not growing as anticipated. Challenges were experienced due to the delay in implementing digital migration. Sentech was facing high costs because of dual illumination, that is, the costs of running both analogue and digital signals. It also faced increasing costs because it pays for leases of satellite space in foreign currency and imports equipment for its operations that is charged in foreign currency.

For 2016 – 2017, Sentech has a new operating model that focuses on three core business areas, namely content and multimedia services; infrastructure management services and connectivity services. There will also be a general focus on improved customer satisfaction and business sustainability. Members raised concerns about the impact of dual illumination on Sentech’s finances and asked whether it was receiving adequate support from the Department of Communications, the Department of Telecommunications and Postal Services, and National Treasury. The Committee was reassured that Sentech was receiving the required support and was continuously involved in dialogue with these stakeholders on the issue. The issue of skills development and talent management at Sentech was also raised. Due to the nature of Sentech’s business, it requires specialised skills. To this end, Sentech has a bursary programme for engineering students and a number of initiatives directed at enhancing the skills of its staff members. The Department of Telecommunications and Postal Services was commended for the state of Sentech’s governance.

The Nemisa presentation was cancelled because the Committee was not happy with the quality of the report submitted. There were also issues of the board chairperson, Chief Executive Officer and Chief Financial Officer of Nemisa having resigned in the months leading up to this meeting. 

Meeting report

The Chairperson rebuked the Department of Telecommunications and Postal Services for not sending the Committee the correct list of delegates attending the meeting.
Briefing by Sentech
Mr Magatho Mello, Chairperson of the Board of Sentech; stated that the sector was not growing due to delays in licensing, especially in TV licences. The cost of dual illumination has also been a big factor in the low growth of the sector. However, the Department of Telecommunications and Postal Services had committed to granting additional funding to Sentech. It was also intended to appoint a CFO. It is anticipated that the trading environment will become tougher.

Mr Mlamli Booi, CEO of Sentech, presented the general outlook for TV, radio and Internet services. The market is not growing as fast as desired. Due to the delays in launching Digital Terrestrial Television (DTT), many households have acquired satellite services to access digital channels. The terrestrial sector has declined in size as a result. Despite this, DTT is expected to grow quickly once it launches.  OTT video (video on demand) is gaining ground in South Africa and it competes directly with current broadcasters; especially established pay TV operators such as Multichoice. Broadband access has expanded. particularly in urban areas. The market for radio is continuing to grow but it is not growing fast enough due to limitations in the availability of spectrum space. Internet access provides opportunity for a hybrid of broadcasting and Internet services.

The general focus for the year is on increased consumer satisfaction and business sustainability. Sentech has a new operating model that focuses on three core business areas namely content and multimedia services, infrastructure management services and connectivity services. Underlying these focus areas will be an emphasis on research and innovation supported by skills development. Skills development is an important area for the organisation because it needs skills that are different from those required in analogue times.

On content management services, Sentech will continue to optimise its FM radio network to improve service availability. It will also assist the public broadcaster in expanding its FM network to cover the areas not adequately covered. After successfully completing a trial for digital radio services in Gauteng in 2015, Sentech will engage policymakers and the regulatory authority on the finalisation of the policy and regulatory framework for digital radio. A challenge to the digital radio project is the cost of handsets but the market will correct this. Short wave and MW radio are becoming obsolete and are expensive to maintain. Sentech will re-evaluate whether to continue to provide short-wave radio services in the present financial year. For MW radio, growth is dependent on additional MW radios being issued and the evolution of MW from analogue to digital. Sentech has therefore completed a trial of digital MW radio and has submitted the results to the Independent Communications Authority of South Africa (ICASA).

The future sustainability of Sentech depends on the success of the free to air commercial DTT service. The rollout of set-top boxes is important for the transition from analogue to digital. Sentech has a digital migration plan for which it has developed an analogue switch off tariff model that has both digital and analogue tariffs. For its business radio and TV services, Sentech intends to create a multiplatform environment offering traditional satellite broadcasting, push video on demand live streaming and Internet Protocol Television (IPTV).

Under its infrastructure management services, Sentech plans to provide equipment, hosting and storage services for other players in the market. This will provide comprehensive site management and maintenance services. It will also lease facilities to customers and provide access to about 220 transmitter sites nationally. The aim is to monetise these sites because more space is available due to the move into digital services. Sentech intends to pursue opportunities to provide consulting services in the areas in which it has expertise to other African countries.

The organisation’s strategic projects were set out. These are enterprise supplier development, human capital interventions, DTT commercialisation, SAP upgrade, facilities management and business continuity management. The enterprise supplier development project was linked with Black Economic Empowerment (BEE); its aim is to provide support to historically disadvantaged suppliers. The human capital development project exists because many staff members with technical skills are retiring and therefore there is need for new skills. With the DTT commercialisation project, Sentech is in the process of stabilising its network to be able to provide commercial services. Internally, it is upgrading its enterprise resource software (called SAP) to be able to automate processes and ensure that data is secure. Business continuity management has been an area of concern; hence Sentech has created a plan to address this, which is being implemented this financial year.

Sentech’s key performance indicators were presented next. There are two groups of such indicators; the first group consists of targets derived from the Department of Telecommunications and Postal Services strategic goals and objectives while the second group consists of Sentech’s internal goals and objectives. Some of the targets from the first group include participating in the review and update of the National Radio Frequency Plan, ensuring that networks are shielded from cyber attacks and actively engaging in the development and implementation of the e-strategy. For the second group, Sentech is targeting the construction and commissioning of disaster recovery capability sites, achieving clean audits and achieving high levels of employee performance.

The Chairperson said she wanted to formally flag to Sentech the fact that a meeting on the rollout of DTT will be called. This meeting will be held because it is unlikely that the deadline for digital migration will be met, therefore it is necessary that all stakeholders discuss the effect of the delay of the rollout. Sentech needs to do an assessment of the impact of this delay.

Ms M Shinn (DA) said the presentation showed that Sentech would become one of three members of the national broadband network for SA Connect. Would Sentech become a competitor to the other mobile broadband network providers such as Vodacom, Cell C and MTN because it had a licence to do that rather than focusing on its traditional broadcasting customers? She was concerned to see that dual illumination costs have never been allocated because dual illumination has always been part of the digital migration process. Sentech is now busy with an unfunded mandate that is jeopardising its financial sustainability. Whose responsibility was this, it used to be the Department of Communication’s responsibility but now because of the split it was unclear who had the responsibility of paying for the costs. Surely if the Department of Communications is responsible for the digital migration process it should have budgeted for this, why did it not? Although Sentech reports to the Department of Telecommunications and Postal Services, digital migration is not really the Portfolio Committee’s responsibility; it is the responsibility of the Department of Communications.  What dual illumination costs are anticipated between now and 2019 when transition will hopefully have been achieved?  On the shortage of TV broadcasting customers, ICASA recently turned down some potential free to air broadcasters, what happened to the five subscription based TV operators who had been granted licences in 2014? To the best of her knowledge, ICASA had not made a decision on these licenses. One of the parties had wanted to take ICASA to the Public Protector over this issue because they had obtained the broadcasting rights to Bafana Bafana matches from SABC, since the SABC was now in competition with these people, the licensing process appears to have stalled. She asked if Sentech knew anything about this issue. This was potential revenue that was denied because of ICASA’s bureaucracy and possibly interference from other broadcasters who feared a loss of business. The advertising industry was also concerned about having too many broadcasters because it affects the way they make their money.  Sentech was obviously concerned about the digital divide widening, because the spectrum was not being freed sufficiently for use in previously disadvantaged areas; she asked whether Sentech knew the amount of the potential loss of revenue caused by the delay in rolling out set-top boxes and in switching off analogue signals. She also asked what was he potential impact of the delay on bridging the digital divide.

Mr Mello replied that there was no intention to compete with mobile broadband operators. Sentech has historically run, for example, VSAT, which is a platform with broadband capability. However, there were deficiencies and a need for reinvestment in that platform so the Board took the view for management to revisit this as a platform. The Board’s thinking is high sites that Sentech has are part of its biggest costs, so Sentech can look at lending its facilities on a commercial basis to other players and supporting the other players. It has knowledge in running these facilities and managing third party facilities. In any case, Sentech does not own a lot of the spectrum that is required for the last mile type of services. On Sentech’s financial sustainability; the focus was on taking Sentech’s expertise across borders in order to diversify revenue. Also, one of Sentech’s biggest cost drivers is the cost of satellite communications; which is mainly denominated in US Dollars. It therefore helps if Sentech can earn revenue in foreign currency due to the fall in the value of the Rand.

Mr Booi answered that due to the delay in digital migration, the network will have to be run on a dual illumination basis until set-boxes are rolled out to the market. Infrastructure will need to be replaced and it will be unfortunate if it is replaced before revenue can be earned from it. Sentech is optimistic that in the three years to come, the transition to digital can happen. He cannot answer why dual illumination costs were not budgeted for by the Department of Communications, but Sentech has had discussions with the Department of Communications on this. Sentech has shared the cost implications with the Department of Communications, which has taken everything on board. Dialogue between the Department of Communication and the Department of Telecommunications and Postal Services should leave Sentech in a better position in terms of the required funding. There has also been discussion with National Treasury on funding for digital illumination. Demands on the fiscus have increased since the time of initiating the project and government is prioritising areas seen to be critical. The Department of Telecommunications and Postal Services is supporting Sentech by taking all its costs presented for the next MTEF, of about R140 million per annum, for dual illumination. The majority of this cost is for satellite space leasing and energy costs. On the question on the issuing of new TV licenses, he stated the Regulator had conditionally licensed about five TV operators a few years ago.  One operator called Siyaya TV was successful in obtaining a final licence. Siyaya had signed an agreement with Sentech to come onto its DTH platform and it was anticipated that Siyaya would be operational this financial year.

On revenue loss due to dual illumination, Mr Booi emphasised that revenue from TV comes mostly from analogue. Revenue is being lost by not moving to digital quickly enough. One of the cost drivers was the fall in the Rand’s value relative to foreign currencies. Sentech is affected directly by this because it buys satellite capacity in dollars. This could be motivation to build a South African satellite.

Ms N Ndongeni (ANC) asked how many vacancies were at Sentech and how many female staff was employed at professional level.

Mr Booi responded that the vacancy rate had been reduced to approximately 6.5%. As Sentech was trying to keep its costs down, it was looking into ways of being creative where vacancies are concerned. Sentech was trying to limit its exposure to high cost operations by seeing what it could get away with from an employment perspective. It is good to employ more people as long as you can continue paying their salaries in the future. Sentech aims to keep employment costs as low as possible so that should its revenues become further challenged, its employees’ job security will not be compromised. The goal is to preserve people’s jobs as long and as much as possible. Most vacancies at management level were filled. There are three vacancies at executive level; and there is a bias towards recruiting female candidates at all levels in line with employment equity.

An official from Sentech stated that the figures as at the end of quarter four (end of March) were as follows: Sentech has a total of 540 employees. Nine appointments were made in the last year; of which 13% were internal and 88% were external. 89% of the appointments were black, of which 22% were black females. To date 81% of staff in Sentech is black and 35% are black females. At top management level, 100% of staff is black, and 36% are black females. At senior management, 89% are black and 33% are females. At specialist and middle management level, 69% are black and 29% of that are females.

Mr C Mackenzie (DA) stated it was interesting that a strategic plan was being presented yet the position of strategic executive was vacant, has this been filled yet and if not, how far has Sentech gone towards filling this vacancy? For community radio stations, he asked whether Sentech was finding that some stations were having problems paying licensing charges for example to ICASA and how this affects Sentech’s ability to provide services. For coverage for DTT, he observed that there was no change in the statute provided for from last year to this year; does this mean the plan has been effectively rolled out and that it is completed so the focus is on maintaining the network put in place?  For 2015 and for this year then going forward, what are the estimated costs of dual illumination? He asked about the status of labour relations at Sentech, as there had been a small strike last year. Does Sentech have a targeted bursary programme as part of its training plans? If yes, he asked for details about the number of beneficiaries of the programme.

Mr Booi stated that the strategy executive position that is vacant would be filled by month end. The issue of community radio stations was a challenge. Community radio stations do not earn much advertising revenue so they struggle in terms of funding. Sentech has had a strategy over the years that aims to support these stations as part of its enterprise or socio-economic development strategy. This support is in the form of subsidising the signal distribution costs of these stations. On the question on DTT coverage; last year Sentech had 84% coverage, the balance being DTA coverage. This is the current coverage because Sentech believes that it has the country covered in terms of DTT coverage. It is now in the process of fine-tuning the network so that the network can be stable. It is also filling gaps in some areas; he gave the examples of two sites that are still being completed — one in the Eastern Cape and the other in Limpopo. The Square Kilometre Array (SKA) area in the Northern Cape is a priority area and this is why the Department of Communications has decided to begin rolling out set-top boxes there. Labour relations are still a challenge but the situation has stabilised since last year. The union is still trying to negotiate a thirteenth cheque but Sentech is trying to get the unions to understand the need for it to remain competitive and sustainable by not incurring large fixed costs. Sentech’s board has approved a plan on human resources development that provides support to staff for further education. The plan also includes an agreement to sponsor engineering students from the University of Pretoria and Witwatersrand. Upon graduation, beneficiaries of the bursary are given internships with Sentech, which can lead to permanent employment if vacancies are open.

An official from Sentech stated that Sentech sponsored five students at the University of Pretoria last year, and one had unfortunately died. Three of these passed and are now at the next level of their studies, one is repeating the level and so the bursary is suspended until they pass. Sentech is sponsoring two students at the University of the Witwatersrand. Both passed and are continuing to the next level of their studies.

Ms D Tsotetsi (ANC), referring to the key performance indicator on the protection of networks from cyber attacks, asked whether Sentech has the capacity to do this and how quickly it can move in this regard. She questioned the indicator on the promotion of transformation of the ICT sector through ICT Small Medium and Micro Enterprises (SMMEs), she asked what the status quo of this initiative was. This is in order to allow progress to be measured. Another indicator is ensuring access to ICT infrastructure is reliable. Does Sentech have a contingency plan in case of power failures? She asked how sustainability would be ensured given the economic situation in the country, ever increasing inflation and potential challenges of labour demand. The presentation mentioned the funding of dual illumination as a potential risk facing Sentech. How would it ensure its financial sustainability in light of this risk?

An official from Sentech replied that the entity had put systems in place to make sure firewalls are sufficiently secure. One of the areas being looked at in SAP upgrades is to improve IT security. On SMME support, Sentech regularly invites small companies for training on areas of need so that they can participate in tendering for services and goods that Sentech requires as part of its enterprise development strategy. The environment Sentech operates in requires a great deal of imported manufactured equipment. What Sentech does is to ensure locals perform implementation.

Ms J Kilian (ANC) commended the report. She was concerned about the dual illumination period almost crippling Sentech and asked what initiatives have been taken so far to mitigate the effects. This concern had been raised about five years ago. Has Sentech received the necessary support from National Treasury and the Department? During the budget review process, the Committee had made specific recommendations; including ensuring there is a strategy to benefit ICT SMMEs in the procurement of goods and services. She asked whether this has been done and if Sentech is tracking the numbers. Lastly, one of government’s challenges is procurement and then payment taking place without ensuring the services/goods paid for were delivered in full or to the right standard, what has been done in this regard? This is crucial to improving financial sustainability and had been one of the recommendations made in the budgetary review process.

Mr Booi answered that Sentech has a strict project management process linked to supply chain management that it follows. It therefore does not anticipate any situation arising in the future where people are paid for services that have not been rendered or for goods that have not been delivered. On dual illumination costs, the Minister was aware of the situation and was engaging other stakeholders at the Department of Communications and National Treasury to make sure that Sentech receives the assistance it needs. On Sentech’s part, it was keeping stakeholders updated on developments around this problem in its communications with them. Sentech is also gently nudging stakeholders to prioritise this issue and the stakeholders have responded well to this.

The Chairperson told the officials present from the Department that it is doing something right with Sentech. She urged the Department to extend similar standards to the other entities under its mandate in order to ensure that there is best practice across all the entities in the telecommunications portfolio. She gave the example of the report stating the qualifications and experience of board members. One concern she raised was based on page 58 of the report under alignment with shareholder priorities. This section showed that the Department had not shared its revised priorities with Sentech. The Department had removed ‘stable ICT policy and regulatory environment’ as a goal whereas Sentech still had it in the report as one of the Department’s goals. How did the Department approve the strategic plan after seeing this discrepancy? The Department ought to make sure there is alignment between its strategic plan and its entities’ strategic plans. Dual illumination remains a concern; the sooner this is solved, the better. It is unfair to Sentech because it has achieved its mandate and now it is as if it is being punished for its success by having to maintain two systems. On the issue of renewal of the business model on page 41 of the report; it makes sense but the only hurdle is delay of the DTT. She stated that the issue of licences of community radio stations comes up regularly. There is need for a discussion between Sentech and MDDB around the funding and sustainability of community radio stations. She asked about the progress made towards appointing a CFO. She noted the good work done by Sentech in terms of human resources issues and stated that she was encouraged by work done on this.

Mr Mello replied that Sentech was hoping to finalise the process of appointing a CFO soon but recommendations have been made. There had been delays in providing some clarifications to the minister. The Board has accepted that as a state owned entity, it will always have a challenge in retaining skills. Part of making Sentech an employer of choice is in training and human capital development. It is also important that board members are skilled and understand the business because Sentech provides unique services.

The Chairperson asked about the feasibility of sourcing equipment locally since it had been indicated that Sentech sources most of its equipment internationally. Could it not increase capacity to manufacture the necessary equipment locally? Referring to page 71 on borrowing plans, she asked what the impact of this would be going forward. Is the amount in the report this overall amount intended to be borrowed between 2017 and 2019 or is this in terms of repayment? She noted it was for dual illumination as well. Will the amount carry through; will the amount increase if there is no digital migration and will the amount be borrowed from banks or from other institutions?

Mr Booi responded that South Africa used to manufacture some equipment locally, but at present most equipment is no longer being manufactured locally. Sentech’s strategy is to make sure that servicing of the imported equipment happens locally. It is highly unlikely that the equipment can be manufactured locally under present conditions; at present such manufacturing is not happening at a reasonable scale. In order to create the capacity for local manufacturing — and not merely assembling — of the equipment; the Department of Trade and Industry as well as other departments would have to create a strategy around stimulating local manufacturing capacity.

The CFO answered on the issue of the borrowing plans that the assumption was made that the plan for switching off analogue will happen by 2018. The amount of R502 million in the report takes into account capital expenditure requirements, and the amounts needed to stabilise the network and for other expenses. If capital expenditure plans are to be achieved, there must be provision for short-term borrowing. 

Ms Shinn asked whether the cost of dual illumination was included in previous budgets. If this was the case, what had happened to the money earmarked for dual illumination in these budgets? She queried the amount of R140 million a year for dual illumination; was this the cost of having an extra channel or was this the cost for both of them? If dual illumination was stopped, would Sentech save R140 million a year or would it only save R70 million a year? Page 30 of the report spoke about waiting timelines for the introduction of IMT services; she asked who was supposed to give the timeline for the introduction of these services and what was the delay with this issue. On the digital broadcasting equipment that was installed for DTT ending its lifespan and needing replacement, how much was spent on installing digital migration transmission equipment and what lifespan is left for this investment?

Mr Booi stated that the budget for dual illumination was a commitment made to Sentech by the previous Department of Communications, now the Department of Telecommunications and Postal Services and was linked to a commitment by National Treasury to fund dual illumination. As to who was responsible for changes in the budget, all he could say about that was Sentech received notification that because of the nation’s pressing needs; funding for dual illumination for the financial year had been reduced. Other funding (digital to digital) had been made available for the 2018 financial year. On the cost of dual illumination; the major costs (close to 80%) were for leasing satellite capacity and energy. The dual equipment could not be switched off because that would kill the equipment. The equipment still has a lifespan of about five years. However, as the equipment was installed at different times this is not the lifespan for all of it. IMT services are directly linked to digital migration because digital migration will mean that the 800 mega hertz spectrum has been made available for telecommunications by the ITU. The introduction of IMT is directly linked to Sentech vacating that spectrum. A timeline cannot be put to this because it is linked to digital migration.

Ms Tsotetsi stated that she was impressed by the realistic objectives set out by Sentech that are in accordance with the means available to it. She asked whether any unforeseen risks might hamper Sentech’s ability to meet its targets. On employment equity, it happens often in companies that a large number of employees are black women, yet they tend to occupy low-level positions.

Mr Booi answered that Sentech’s board has a committee on risk management that keeps a list of possible risks and how to mitigate them. Sentech is genuinely committed to employment equity and has given accurate statistics on employment equity to the Committee.

Ms Kilian referred to page 80 of the report on Sentech’s risk management plan. It listed some uncertainties including the availability of necessary skills. It is important for Sentech to have an effective talent management strategy in place because it operates in a rapidly changing technological space. How long do students who receive bursaries have to work for Sentech to ensure that it derives benefit from its investment in human capital? Technology evolution is also listed as a risk; what measures can Sentech take to mitigate such risks? What additional risks to Sentech’s operations are anticipated? On page 81, she asked for an explanation on whether this meant that no steps had been or that only half of what was intended was achieved. She was impressed by the plan against fraud. She asked if measures such as a fraud tip off hotline have yielded any success so far.

Mr Booi stated that talent management and skills retention are difficult for state owned entities. As an organisation, it had accepted that it acted as a training ground for the private sector. It is sad to lose staff but happy to contribute to the growth of the sector. Sentech does not pay staff badly relative to other players in the sector, but has a limit as compared to the private sector.  It has increased the level of visibility of training for technicians within the organisation as part of its talent management strategy. Sentech has a policy where members of staff that benefit from having further education funded by the organisation have to spend the same number of years employed by Sentech.  On additional threats faced by Sentech, currently Sentech had to make sure that DTT works for it. It also took the view that as a country South Africa must stay terrestrial because this is easier to control and is more cost effective. The exchange rate is also a big threat as well as the current macroeconomic problems. There have been no serious issues of criminal activities lately. Through the internal audit function, it receives information on internal hotline reports. The issues that have come through so far have not been on finances disappearing so far. In the last two years, no significant report on financial corruption has come through on the hotline.

Ms Kilian stated that the problem was usually with contracts being improperly awarded and contracts being padded. Is this adequately protected against?

Mr Mello responded that risk and audit committees have been guarding well against these types of issues. Again, the hotline has not reported issues of financial misappropriation.

The Chairperson said the report was a good one. The comments made by members show that the Committee is concerned about dual illumination issues and their impact on Sentech. She reiterated to the Deputy Director General of the Department of Telecommunications and Postal Services the point about carrying best practice across the Department’s entities, as this made the Committee’s oversight function easier.

Briefing by Nemisa
The Chairperson asked Members to decide if the document presented ought to be withdrawn because its quality was unsatisfactory. There was also the challenge of the CEO, the CFO and the Chairperson having resigned in February.

Ms Shinn asked why the CFO and the CEO resigned. This showed that something must be very wrong at Nemisa. She agreed that the plan should not be considered in its present state.

The Deputy Director General of the Department of Telecommunications and Postal Services stated that the Chairperson resigned because she felt there was too much work. The CFO resigned because they had a better job offer with conditions that Nemisa could not match. The CEO had left after deciding to run a family business.

Ms Tsotetsi asked whether anything in the employment contract binds one to be with company for a certain length of time, considering the expense and trouble of interviews.

Mr E Siwela (ANC) agreed with the Chairperson that it was wise to pause consideration of the report.

Ms Kilian supported the chairperson on suspending consideration of the report.

Mr Mackenzie supported the Chairperson. He asked when the resignations were submitted to the Minister. It seems immoral for people who are so crucial to an organisation to abandon ship just before they were due to appear before Parliament. Some kind of strong comment from the Portfolio Committee should be released on this.

The Deputy Director General replied that the CEO and CFO resignations were submitted in February, with effect from the end of February. The board chairperson had resigned earlier, probably in January.

The Chairperson stated that a thirty-day resignation period is normal; the notice period in question was abnormally short. There is need for the Department of Telecommunications and Postal Services to work closely with its entities. She noted the comments made by Members.

The meeting was adjourned.

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