Broadband Infraco on its mandate and role in the ICT sector

NCOP Public Enterprises and Communication

24 August 2016
Chairperson: Ms E Prins (ANC, Western Cape)
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Meeting Summary

Broadband Infraco (BI) gave a briefing to the Select Committee on the mandate and role and the relevancy of Broadband Infraco in the ICT sector. The Company highlighted its infrastructure projects in each of the nine provinces in the country, including ones that are yet to be completed. The mandate of the company is to ensure that access to electronic communication is expanded and made affordable in areas including underdeveloped and underserviced areas. The company also has an objective to support projects of national interests. A snap overview of what the company has been able to connect was given, but Members were asked to look at the presentation handouts for more detail, including the specific work done in each province. The company uses Transnet and ESKOM servitudes. It had tried to drive economic transformation within the Department of Public Enterprises by ensuring that it does implement the policies of government and empower black owned entities and women owned entities.

The background was explained. In 2011 there had been a capital injection but since then nothing was received by way of allocations. In March 2012 Neotel was still the company’s major customer but the Rights of Use Agreement enabling it to use all of its network came to an end, when it had to pay market related rates and reduced its services. BI took over the company and had to fix the network, refurbishing the equipment and ensuring that it would open access data centres or PoPs to connect with other third parties. The network currently is connecting more people, having around 25 customers at present. Internet Protocol Technology is used, which enables even smaller companies to come on to the BI network, making up to about 25% of services which are internet protocol based. The State Information Technology Agency SITA was an anchor customer on its network providing backhaul services, and the BI was able to meet service level agreements to provide for more diversity on the network.

Members appreciated the presentation, but sought clarity on who were the service providers, the kinds of indirect jobs being done, who were companies providing services and what criteria were used. Members questioned the loss of revenue and the viability of the company, and it was stressed that although there were losses, they had improved over the past years, and the EBITDA was positive. Members asked how the company planned to rectify losses, and whether it felt positive about being able to achieve the projections. Another point of discussion was that of the role of the company in the Basic Education sector. One Member suggested that the youth inclusion target in the company should increase from 10% to 20% because of the high rate of unemployment in the country. Other questions related to customers, how the Points of Presence were chosen, any assistance that was given in setting them up. A Member questioned the cost of sales figures and said that he did not think they were necessarily correctly reflected. Members asked why the BI was anticipating a drop in some costs.
 

Meeting report

Broadband Infraco briefing on its mandate and role in ICT sector
Mr Rendani Musetha, Chief Director: Oversight, Department of Telecommunications and Postal Services (DTPS) outlined that Broadband Infraco (BI) had been asked to explain its’ role and relevancy in the ICT industry and telecommunications as well as highlighting its projects, including setting out what was happening in the provinces.

He noted the apology of the Minister of Telecommunications and the Director General, and said that the Chief Executive Officer of Broadband Infraco would take Members through the presentation.

Ms Puleng Kwele, Chief Executive Officer, Broadband Infraco, greeted the members once again and introduced her colleague Gift Zowa, the Chief Technical Officer. She noted that Broadband Infraco was formed by the Broadband Infraco Act, in order to “expand availability and affordability of access to electronic communication, including but not limited to underdeveloped and underserviced areas”. The company is also mandated to support projects of national interests, and is meant to do everything in accordance with the Electronic Communications Act (ECA). The company has an Electronic Communications Networks Services (ECNS) license but does not have an Individual ECS license (IECS) even though the two are included within the Act. The company is guided by the medium term strategic framework and enable quality basic education and a long and healthy life for all through procurement and the projects that they do. Broadband Infraco enables decent employment through inclusive economic growth and internally in terms of their investment in their employees to enable an efficient, competitive and responsive economic infrastructure network. The company has a 9 point plan which includes unlocking the potential of SMMEs, cooperatives; township and rural enterprise. In terms of other state owned enterprises, Broadband Infraco attends to backhaul connectivity at a provincial and municipality level. The company measures what it does with kilometres of fibre, points of presence (PoP) (which are points at which people connect), as well as the speed at which it can transport communication.

When the company was founded it was given R1.8 billion as an allocation from the 2007/2008 financial year up to 2010/2011 financial year. The full allocation was invested in ensuring that the infrastructure was rolled out. During that period, the company had an agreement with the second network operator and there was an exclusive mandate for that as the company was also not licensed, implying that it could not sell to other third parties. Broadband Infraco was licensed in 2009 and connected its first customers in 2010, at the time the Rights of Use Agreement was still in place. The contract came to an end in 2012.  The company’s management team had tried very hard to keep the company sustainable, and improved its network to provide quality service to its end users. In the 2015/2016 financial year there were some projects that are still continuing, because the specific infrastructure projects take some time.

Mr Gift Zowa, Chief Technical Officer, Broadband Infraco set out the number of kilometers for each province and the key projects per province. In the 2015/2016 financial year the company had completed and rolled out 84.6km of fibre and 6 PoPs had been refurbished in the Eastern Cape. The company still plans to complete 28.5km and several PoPs which are still in progress should be completed over the rest of the year. He directed Members' attention to the remainder of the detail in the slides. BI reported on progress every three months and tracked the progress monthly as the key projects were rolled out.  There were 1 113 km built to date, an increase from the 1 023 km three months ago, expecting to rise to 1 180 km after completion of the two major projects. There were 34 PoPs, expected to rise to 41 PoPs by the end of the current financial year.

The Chairperson interrupted to ask for clarity on what PoPs are.

Mr Zowa said this was where the company would have its equipment The CTO said that that the question is very relevant and PoPs is where the company would have its equipment. A PoP is normally a big building or container where the fibre is taken into and switched on in order to connect the customers from the PoPs.

Ms Kwele added that an example would be the Telkom boxes, which are an access point.

Mr Zowa continued with a brief summary of the progress made in building more fibre kilometers and roll out of PoPs or customer sites. In Kwa Zulu Natal the company had completed all the fibre builds that were planned for the current financial year – 147 km and eight PoPs which were either refurbished or built to connect the customers. In the Free State the company had largely completed 5km and two PoPs. In North West 101 kilometres had been completed with 11.7km currently being built with one PoP. In the Northern Cape the company has planned a total of 11km with 3km outstanding and currently being built, and one PoP complete and one underway. In Gauteng and Limpopo all of the projects have been completed as well.  In Mpumalanga, at Emalahleni there was still a need to build 8 km of fibre and one PoP. The current projects should be completed within the next quarter. In the Eastern Cape the company is still building about 8.5km and two PoPs. The services offered are services related to Home Affairs, SITA, ID books and other services around social requirements.  In the Western Cape there is 10.5km outstanding, with 320 km built so far, and 5 pops.

Ms Kwele said that BI, as a licensed entity, had universal obligations and had until 2017 to complete some of them. The company had to engage with roads agencies and municipalities to get access to the roads and servitudes, and sometimes the plans take up a lot of time. The obligations of the company are divided for each province. In the Eastern Cape there is still some outstanding work that needs to be done in Ukhahlamba with the building of a PoP. Obligations had been delivered in Eastern Cape, except for Ukhahlamba. In Free State, Fezile Dabi district still has outstanding work that requires attention. Mkhanya Kude in KwaZulu Natal is also outstanding. All obligations in North West have been fulfilled. In Mpumalanga Mhlanzeni there is also some outstanding work. In the Northern Cape the company was not given specific districts but specific towns to deliver to, but there were a number of areas where BI had not been able to roll out.

BI's  approach to underserviced areas was that it would be helpful if the customers being connected needed services, to enable it to recover, and so the connections were largely used for diversification of traffic movement on its network. Because many of these areas had no traffic, BI had to look carefully at how to roll out infrastructure in a cost effective way while fulfilling its licensing obligations.

BI had achieved the implementation of a strategy that ensured that it would roll out infrastructure where it will be used to ensure that the company does generate revenue. The company has continued to ensure that it drives economic transformation within the Department of Public Enterprises (DPE) by implementing the policies of government and empowering black owned entities and women owned entities. It was proud to achieve a positive EBITDA at the end of 2015/16 year earnings, despite the fact that BI had been running at a loss (R240 million at end March 2015, improving to R90 million at end March 2016). There had been economic transformation in terms of a three year overview. It had not been able to measure jobs to suppliers in 2014 and 2015, but now it did request information at the beginning of the contract and also measured it at the end of the contract. The financial performance of the company between 2012 and 2016 was provided.

In March 2012 Neotel was still the company’s major customer and the Rights of Use Agreement enabling it to use all of its network came to an end, when it had to pay market related rates and reduced its services. Then, BI took over the company and had to fix the network, refurbishing the equipment and ensuring that it would open access data centres or PoPs to connect with other third parties. The network currently is connecting more people, having around 25 customers.

The company now uses internet protocol technology on its network which enables even smaller companies to come on to the BI network, making up to about 25% of services which are internet protocol based. The company has moved away from just having one customer to having three. The State Information Technology Agency SITA was an anchor customer on its network providing backhaul services and the second network operator also provides backhaul services to them as well as another network mobile operator. This is only achieved because the company is able to meet the service level agreements (SLAs) that are required to ensure that BI provides diversity on the network.

Discussion
Mr J Parkies (ANC, Free State) appreciated the presentation from the company, although it was complex. He asked who the service providers were, what kind of indirect jobs were being done, and whether they were black of white. The criteria that the company used were linked to identifying a particular site to establish a PoP; for instance in the Eastern Cape in Cacadu District it was necessary to look at how the company's work would translate and impact on ordinary people in the rural areas. The same would apply in Gariep District in the Free State, where poor members of society did not have access to technology or Wifi.

Mr J Julius (DA, Gauteng) noted that Broadband Infraco was now reporting to the Select Committee, and there were other events outside of the presentation that would impact on this in future. There was a call from the President that some State owned companies be sold or partly sold and the relationship between BI and Telkom “comes and goes”. He asked what the current situation was. He noted that the company made no profit in 2010, asked for clarify on slide 23 and their approach to the Development Bank and Independent Development Corporation (IDC) and how they planned to increase the shortage of revenue. Mr Julius was aware that there have been calls for additional funding, but wanted to know how far this process was. The auction of new broadband spectrum to address the shortage of high speed internet is opposed by the Department, and asked what BI's own opinion was based on the impact of this on its operations.

He was pleased to note the unqualified audits, because it was an indicator that some things were going well. He was not sure how the cost of sales applied, and what was being sold. He noted the improvement in its financial position, but despite the significant reduction, the fact remained that this was still a loss, and he wanted to know the impact. In 2010 the company had to use some funds for infrastructure, but at some point the company does need to start generating money. He asked what was to be done to minimise the loss and how long would the process take. 

Ms C Labuschagne (DA, Western Cape) noted the timeline for completion is 2017, and asked if this would be met, otherwise what the reasons for not achieving this would be. She asked what was done in 2011/12, and the reasons. The target set for the youth job creation was 10% but BI only achieved 6%, and she asked the reasons. In fact, she asked why the 10% target was not much higher – given that the company is a state owned company, where development and transformation should be a prime aim. She asked why gross profit fluctuated yearly, and whether this was symptomatic of a problem in the company. Since the idea of a state owned enterprise is to make services offered available to everyone, what is the role to ensure that the end users will reap the benefits of the reduced costs, and the time frame again?

The Chairperson asked how many SMMEs or township enterprises would need to be assisted. He asked if people were charged for using open access. What factors were contributing to the problem of losses and could they be reversed to make BI more sustainable. The Department is about to go to a conference to make a decision about the SOCs, and the Committee hoped that there would not be a recommendation that BI would close. The Chairperson asked about the costs of putting up PoPs and how many had been put up.

Mr Sefako (ANC, North West) asked whether, by saying that obligations in North West are completed, BI meant that the community is enjoying access to the network. He noted that villages near Gabarone did not have connections. He asked what its relationship was like with neighbouring countries and had it been able to enter those territories.

Mr Parkies asked what contribution the company has made on basic education thus far, as well as the level of skills developed since the establishment of the institution.

Ms Kwele started off by proving a context before addressing the questions one at a time. On slide 6 of the presentation the figures shown indicated the monies that were allocated to BI by the State and which year they were allocated. To 2011, there had been R1.8 billion allocated to the BI, and it was a Tier 1 investor in the West Africa Cable system. 70% of the initial capacity is being used by the Department of Science and Technology (DST) for Square Kilometre Array, a project of national interest. As a wholesale provider the company provides services to other third parties such as Neotel, Vodacom, Cell C and a whole lot of other small operators and internet service providers. The company provides support for projects of national interest and provides backhaul for SITA and other operators on the network. The Chief Director added that there is an interconnectivity around the SADC region and the CEO had also mentioned that the company does business with BTC and SPCT, and also connected Neotel to Swaziland. It had operations that hold investments on behalf of the Lesotho regulator, Botswana and Zimbabwe. BI does have connectivity near and in Botswana, and is looking at diversity for Botswana, working with state owned operators there.

She said that the R1.8 billion provided to the company has been used on assets because the transmission equipment did not come cheap. These assets were shown on the financial position slide of the presentation. The Rights of Use contract had basically enabled the second network operator to use Broadband Infraco network. When it ended in 2012, BI focused on ensuring that it could deliver on their mandate, beyond just servicing their obligations and making sure that the network and equipment is updated. The life span of the transmission equipment of the network is five years.

On the question of indirect jobs provided by service providers she noted that BI rolls out fibre, which either needs to be dug up and put in trenches or put up on poles. Black-owned companies are used to do trenching, and that company provides labourers from the area where the trench will be. The kind of jobs vary depending on what service is required but the most basic job is the trenching job as well as engineers to provide oversight. The company uses BBBEE certificates and they understand the value that they get from multipliers for using people with level one certification. However, BI felt that this was not going far enough and now required its suppliers to provide them with information about their employees, and their shareholding certificates in order for BI to get reports which are beyond BEE level. In 2014 BI developed its economic strategy which requires the company to complement the certificate with checks to ensure that the enterprises were what they claimed to be.

Certification required may sometimes be cumbersome for the SMMEs and so one of BI's initiatives is to train them on safety and health issues, to be compliant with the safety regulations of the country, because training must take place in order to work with Telkom and Transnet. She mentioned that BI would normally be provided with locators of where the PoPs must be, by the customer, but where there is existing infrastructure it might not go to that area. Sometime BI might chose a set area for a PoP, but the municipality would not give permission, which meant that it would have to find another point.

The Chief Director added on the company ideals by mentioning that the company is mostly based on Eskom and Transnet servitudes and fibres. Its key infrastructure is already based on government infrastructure, which it would not be desirable to end up in the private sector, which will not prioritize service obligations. It was for this very reason that BI was created in the first place, in order to use government services to provide quality services to the people. One of the obligations was to have connections in all the neighboring countries. Last year that had been achieved by creating a PoP on the border between South Africa and Botswana. Countries like Botswana and Zimbabwe have looked at the methodology and have adopted the same method and come to BI for training on how to use their railway and electricity infrastructure. The company’s network largely consists of fibre network which runs on the railway line as well as the Eskom infrastructure and at every area where there is a PoP, the company has equipment which lights up the fibre in order to provide the required services. The majority of the fibre that needs to be laid out to connect the customers has been done by black subcontractors and it is the company’s mandate to ensure that black people are employed and empowered. Some of the equipment that goes into the PoP is imported from overseas via the major suppliers. BI will insist that subcontractors or the people that are going to install the equipment are BEE people, and will check their credentials. BI also trains interns; 20 are to be trained in engineering and telecommunications skills, and the company also goes through mentorship programmes accredited by the Engineering Association of South Africa. The mentees, after completing their training, are in high demand but the downside is that they will resign, taking their skills elsewhere. 

Criteria used by the company to establish PoPs would include customer demand, lack of funding, the market and the place where services were wanted, and considerations around competing locations.  In relation to access to the connection, in areas such as Cacadu in the Eastern Cape, it was stressed that the company does not yet have the license to provide individual services to individual customers. It provides services to SITA who then provides to the Department of Home Affairs and other departments. BI is the backbone supplier of SITA, not a direct service, but the support structure provided enables SITA to distribute the required government services. Once the company has established a PoP in a particular area this makes it easier for any other government entity to bring in an office and services to the people.

Ms Kwele reminded Members that slide 24 of the presentation mentioned that the government invested R1.8 billion in the company and R1.3 billion is sitting in assets of the company. R91 million is a loss to the company, and it has been driving to ensure that the network can be used by other third parties and has so far been able to achieve that by increasing its customers as well as its revenue. The cost of sales mentioned on the presentation refers to the fibre, the equipment and whatever investments ensure good service to the users. The company does sell a service but there is a cost to the service. For instance, for one PoP to run there have to be rectifiers, air conditioners, transmission equipment and others and these are state assets. BI tries to break even and is trying to optimise cost of sales. She repeated that although there was a loss, BI is now EBITDA positive. The fluctuation of the gross profit is a result of a customer connecting, and there was a need to deploy a lot of infrastructure for that connection, with cost of sales for that connection reducing other profits. The numbers do show that BI is still on track, and hopefully can drive the loss into a break even point. She also made the point that no allocations had been made since 2011.

She was confident that BI could complete its projects in 2017. Everything needed to run the projects was in place.

In answer to questions about youth employment, she said that the industry is a skilled environment and the company does advertise, but the skills are not often found amongst the youth. There has been an increase of women in the industry.

The Property Plant and Equipment (PPE) audit findings resulted from challenges with a policy, but BI had worked hard to change that, and had no adverse PPE findings in the last financial year. It had managed to protect the assets that are critical for the business to be able to deliver the service

Mr Zowa said that when the company started the cost of STM1 was an equivalent of R1.6 million rand per month, which, with the entry of BI, dropped to around R300 000, which showed its impact in the market. Costs might drop still further with the help of government policy and interventions This was not something that was generally known.

The point was made that more SMMEs were connecting, selling internet protocol services to their customers. The SMMEs must be licensed by ICASA as this is a regulated industry. BI sold to people who were licensed, or who were exempt from licenses (like the Departments of Science and Technology, or Defence). There is a cost for open access; it may be affordable but it is not free, as the infrastructure still needs to be maintained. Open access means that BI is not restricting other operators to come and they must abide by the rules and regulations that operate there.

Mr Julius was pleased to hear the clarity on the cost of sales. It made it clear that the company is buying in assets but not selling them, to render a service, but this did not make accounting sense. He thought that it could have a severe impact on the company’s accounting equations in their financial reporting because the balance sheet reflected all of these assets. According to accounting principles, cost of sales can never be an asset.

Mr Zowa said that because BI is building projects for new customers, there is also now a migration phase between the existing customer still requiring services, which meant that the BI  y has to lease services from Neotel, for example, while the new service is being built. That lease came with costs. The reference to making a breakthrough meant that the company would be cutting some of the losses, once the projects were completed.

Ms Kwele spoke to the question of irregular expenditure. Management did analyse the regular expenditure. Irregularities mostly arose when people did not comply with certain aspects of policy but in these cases the services would have been rendered, and the prices would have been right, so there would be no need to re-collect. BI had worked very hard, in the Supply Chain Management side, to ensure that rules and regulations were followed.  It could not deliver entirely on the mandate, because of limited funding, but it was trying to ensure that the value of the company and jobs were preserved. The shareholder loan was holding it back.

She said that the costs of PoPs range between R1 million rand to about R40 or R50 million, depending on equipment used.

The services provided by Galela Services and the backhaul is provided by Broadband Infraco and there are a number of entities that provide similar services. The company has adopted a school in Limpopo that the CEO believes could meet the standards of any school in the Northern suburbs of Johannesburg, because it has a satellite, Wifi, fixed connectivity and BI had provided the school with tablets with content in them, which had provided access to information and huge increase in results. BI chose the school as a firm believer in the future provided by science and technology. It was working with the newly formed Limpopo connection to assist and ensure that there is no influx into one school because there would be duplication of a similar projects in other environments.

Mr Zowa said that BI had worked hard to minimize the losses, despite getting no funding for five years. It had had to renegotiate with all the company’s major suppliers, to get huge discounts. Many of the current projects would be completed by year-end, which meant that the costs of leasing equipment and buying material for the projects would drop.

In regard to whether there was a deal or a merger between Broadband Infraco and Telkom, he said that on 24 September there had been a media article speaking of the sale of the company, to be partly privatised, but he was not aware of any proposed merger. The nationalization project was looking at how the SOCs within the ICT industry can cooperate and work together to provide the services to people.

The Chairperson commended the delegation; the presentation had been clear, well delivered, she was pleased to note that there was a woman CEO, and the answers had satisfied the Committee.

Mr Parkies said the Committee understands that BI operates on meagre resources, but it would be positive if it could increase the numbers of skilled people.

The CEO mentioned that she has been a CEO for just over four years, and had taken on BI when it had received qualified audits. She would strive to ensure that Africans and women were more accepted in the industry, but nobody was excluded. The company was where it was now because of its fine employees, and it had managed to partner with the Communication Workers Union in ensuring that stability was created.

The meeting was adjourned.

 

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