The Select Committee on Public Enterprises and Communication met via a virtual platform with Broadband Infraco (BBI) and the Department of Communications and Digital Technologies to discuss the company’s financial sustainability and its prospects of merging with Sentech.
The Committee was advised that although the merging of these two government entities was a topic of interest in the meeting, the focus was on the financial sustainability of BBI. Although the discussion started off with an exchange between Committee Members from the EFF and the DA, there was consensus that the company needed immediate assistance. Arrangements were made to communicate BBI’s concerns to the Minister of Trade, Industry and Competition, Mr Ebrahim Patel, and the Minister of Communications, Ms Stella Ndabeni-Abrahams.
BBI explained that since its inception, it had been capitalised only once by government and the Industrial Development Corporation. It lamented that this was unsustainable, as every business demanded some form of capitalisation to maintain growth. The company’s financial struggles were evidenced by its negative balance sheet. This was worsened by the conversion of shareholder loans into company liabilities by adopting the International Financial Reporting Standards. Apart from its financial woes, BBI reported that it faced competition from non-Information and Communication Technology state-owned companies. Among these was Eskom, which was hostile despite the company’s attempt to draft a model of cooperation.
To overcome its problems, the company was in the process of converting shareholder loans into equity. In this way, the company was going to engage the capital market to finance its debt. This transition involved convincing its main shareholders -- government and the Industrial Development Corporation -- to convert its loans to equity. These shareholders had agreed and completely subordinated their shares. However, to complete this process, the company had to be endorsed by the Ministry of Trade, Industry and Competition. Unfortunately, this had not happened. The company claimed to have missed out on important opportunities to solve its financial problems because of this delay.
BBI briefed the Select Committee on its ten-year strategy, which involved strengthening its financial position, improving infrastructure, growing the customer base, and improving fibre connectivity on the outskirts of the country. The merger with Sentech was another long-term plan. The benefits from this process included optimising the company’s services through improving operational costs and maximising the company’s service provision by using Sentech’s infrastructure. Despite the company’s challenges, it had expanded its customer base and recorded an increase in its budgeted revenue. Its cash by generation had become positive after a long time of being negative, and its operating expenses had dropped by 11%.
The Department of Communications and Digital Technologies confirmed that BBI was facing financial problems and that due to the country’s economic challenges, it was difficult for it to acquire capital for the company through fiscal financial applications. It therefore supported the decision of shareholder conversion, because it allowed the company to engage the capital market.
Members of the Select Committee raised concerns about why the company had been capitalised only once. They asked for more details on who was funding the company, and requested a breakdown of the company’s expenditure, and its activities over the years. More questions were asked about why Minister Patel was delaying approval of the shareholder conversion, and whether the merger would compromise BBI’s mandate to provide fibre to under-serviced areas of the country. Lastly, the Chairperson expressed great disappointment at Eskom’s hostility, adding that he now understood why the country was facing power cuts -- because Eskom was focused of issues that were beyond its mandate.
The Chairperson greeted everyone and welcomed the Broadband Infraco’s (BBI’s) administrative staff, representatives from the Ministry and Members of the Select Committee to the meeting, and invited the Chairperson of the BBI board of directors to lead the presentation.
Mr Mandla Ngcobo, Chairperson: BBI, said the core objectives of the presentation were:
- To provide financial highlights for the 2019/2020 financial year.
- To discuss the prospects of merging BBI with Sentech.
BBI merger with Sentech
Mr Andrew Matseke, Chief Executive Officer, BBI, said the presentation was divided into three parts:
- The company’s financial stability;
- Its ten-year strategy;
- State-owned companies (SOCs) rationalisation. (This term was used throughout the presentation to describe the merger between BBI and Sentech).
He said 74% of BBI was owned by the government, and 16% by the Industrial Development Corporation (IDC). It had been established by the Broadband Infraco Act No. 33 of 2007, which stipulated that the company had a legislative mandate to expand the availability and affordability of access to electronic communications.
He began by outlining the financial background of the company.
BBI was struggling to raise funding due to matters concerning its balance sheet. Its financial model was unsustainable because it had been ten years since the company was capitalised. In the 2015/2016 financial year, shareholder loans were changed in line with International Financial Reporting Standards (IFRS) to liabilities of the company. Although there was an option to acquire loans through engaging the capital market, it was impossible because the company had a negative asset value.
As part of the solution to raise funding, the company was in the process of converting shareholders’ loans to equity to strengthen the balance sheet. The company’s board of directors had engaged its two main investors on this matter, and they had both agreed to convert their loans to equity. However, this conversion required approval by the Minister of Trade, Industry and Competition, Mr Ebrahim Patel. Until the date of the Select Committee meeting, the Minister had not given approval.
Mr Ian van Niekerk, Chief Financial Officer, BBI, took over the presentation, and explained that despite the challenges discussed above, the company had expanded its customer base by 40%, and recorded a 14% increase in its budgeted revenue. Although the financial value of anchor customers had reduced in the subsequent years, the company had recorded an increase in revenue, and most of it came from the government. The company’s cash by generation had become positive after a long time of being negative, and its operating expenses had dropped by 11%.
Mr Matseke resumed the presentation, and said that notwithstanding the achievements alluded to by Mr Van Niekerk, the company also faced challenges that were not finance-related. Chief among these was competition from non-Information and Communication Technology (ICT) SOCs like Eskom, Transnet, the Passenger Rail Agency of South Africa (PRASA) and the South African National Roads Agency Limited (SANRAL). These entities possessed fibre infrastructure for their internal use, but wanted to commercialise it to generate revenue. This created fierce competition between the two state-owned entities and threatened BBI’s sustainability and that of the future merged entity. To address this issue, BBI was working on a model of cooperation with these entities, but it had encountered hostility, especially from Eskom.
The company’s board of directors pleaded with the Select Committee to assist with this matter by means of interacting with Eskom.
2030 Turnaround strategy
The company’s board of directors had approved a set of long-term strategies. These were divided as follows:
- Stabilise and mobilise;
- Build infrastructure and grow the customer base;
- Grow services to enable digital transformation.
Through these strategies BBI hoped to build a state-of-the-art network, engage in innovative delivery of products and services through strategic partnerships, and to open the untapped rural market for customers to gain access.
There were four important reasons why BBI strongly believed the merger had incredible benefits. These were:
- Strategic positioning.
- Income statement optimisation.
- Balance sheet and tax enhancement.
- Multiple uplift
The first point was based on the observation that merging BBI and Sentech equipment had greater prospects of catalysing BBI’s public mandate to provide broadband to under-serviced regions of the country. For instance, BBI was going to use Sentech’s towers to maximise its coverage. The second was that the merger would improve the entity’s operational costs due to enhanced revenue from new products, services and revised pricing, which made the new company more competitive. The third point was based on the anticipation that the merger would improve the company’s balance sheet through optimising working capital, and the final point anticipated that it would improve the company’s credibility in the market.
The Chairperson thanked Mr Matseke and Mr Van Niekerk for their presentation. He asked if BBI’s Chairperson had any comments.
Mr Ngcobo said he had no additions, apart from emphasising the need to speed up the shareholder conversion approval. He explained that the company had already been to the Development Bank of Southern Africa (DBSA) and received a term sheet of about R800 million, but could not get this money because the company was awaiting approval from Minister Patel.
The Chairperson acknowledged his remarks, and opened the meeting for discussion.
Ms M Mokause (EFF, Northern Cape) requested clarity on why the entity’s balance sheet was always negative, despite cash injections from various donors and shareholders.
Mr A Cloete (FF+, Free State) interjected and asked if it was permitted to have party regalia as a background in a virtual Committee meeting platform, as Ms Mokause had done.
Ms Mokause replied that Mr Cloete had to return to Senekal and “tell those racists to stop threatening our people.”
Mr Cloete said he was speaking to the Chairperson and not Ms Mokause.
The Chairperson replied that Ms Mokause had forgotten to change the background, and referred to an incident where he made a similar mistake.
Ms Mokause maintained her initial remark and reiterated that “they” were coming for Mr Cloete’s “people.” She expressed her sincere apologies to the Chairperson, but said it was not to “the racist party that continued to bully” the people.
After these remarks, she asked why Minister Patel was withholding the shareholder loan approval. She requested the names of the people and shareholders who financed the entity.
Mr Cloete asked the Chairperson for clarity on the agenda of the meeting. He said it was not consistent with the heading of the meeting, which highlighted that the discussion was going to be on BBI’s merger with Sentech.
The Chairperson replied that the current meeting was concerned with the financial viability of the company, although the discussion about the merger was going to be done in the future when Sentech was also present.
Mr Cloete acknowledged the Chairperson’s response, and said he was covered.
Ms T Modise (ANC, North West) asked why the shareholders had capitalised the company only once. Was it because they were not satisfied with the company’s use of the capital? She asked the board to answer this question before she followed up with more questions.
Before welcoming responses from the BBI representatives, the Chairperson asked for details on the challenges that the entity had encountered in completing the IDC shareholder transaction. He asked representatives of the entity to explain how they wanted the Select Committee to assist.
The Chairperson commented on the alleged hostility of Eskom towards BBI, and remarked that Eskom’s interference with matters beyond its mandate was possibly the reason why the nation was facing power cuts. He said its main concern was to supply electricity, not fibre. Therefore, in the future when the Committee engaged Eskom, it was important to find out where its hostility was stemming from.
Ms Modise reminded the Chairperson that she had pending questions that she wanted to ask before she lost internet connectivity.
The Chairperson then asked representatives from BBI and the Department of Communication and Digital Technologies (DCDT) to address Ms Modise’s questions first.
Mr Ngcobo referred Ms Modise’s question to the DCDT, because the capitalisation issue had a historical context which only the DCDT could explain.
Mr Rendani Musetha, Director: Broadband Strategy; Department of Public Enterprises (DPE), said that from the outset, when the DCDT had started to finance the BBI, capitalisation was meant to be through equity. This was the reason why the DCDT had been able to agree on shareholder conversion into equity. Throughout the years, it had encouraged BBI to submit funding requests. However, due to the country’s economic challenges, it became difficult for the DCDT to acquire capital for BBI through fiscal financial applications. To solve this problem, it had encouraged shareholder conversion because it allowed the entity to engage the capital market. He emphasised that this was especially ideal for BBI, considering that its debt to equity ratio was skewed – meaning that BBI had not acquired so much debt, therefore accumulating debt through equity in the capital market was going to conveniently balance its equity to debt ratio.
Ms Modise acknowledged Mr Musetha’s response, and enquired if the capital that BBI received from the DCDT had been equity or a loan. If it was a loan, was the entity expected to pay it back to the creditors? She asked if BBI’s public mandate to provide broadband to under-serviced areas of the country was going to be compromised by its merger with Sentech. Had the company lost any of its skilled staff to its competitors due to the SOC rationalisation process?
Mr Matseke responded to Ms Mokause’s question that the money injected by the government was used to build BBI’s network. This included buying fibre from Eskom, and Transnet and building fibre network equipment. He said what was important was how this capital was treated in accounting terms. In line with the IFRS, the accounting classification of investments made in the 2011/2012 financial year had changed in 2016 to liabilities. This was a noteworthy change, since in the previous years this capital was not treated as a liability.
Mr Van Niekerk reinforced Mr Matseke’s point, and stated that the loans from the shareholders were completely subordinated, and that if the company experienced a crisis they stood last to be paid. He emphasised that BBI was not going to pay the loans unless demanded by the shareholders to do so. This, however, was unlikely, since the shareholders had subordinated their loans and authorised their conversion to equity.
In response to Ms Mokause’s second question, Mr Matseke explained that although BBI was affected by Minister Patel’s decisions, it did not report to him, as interaction was always indirect. For instance, in the feedback from the IDC funding, the entity had received clarification questions from the Minister. However, their concern about the shareholder loan approval issue was that they had not received any clarification questions from him. This suggested the issue had not been resolved. No reasons had been given to explain the delay, so a meeting with Minister Patel had been scheduled to reach a consensus on this issue.
He then asked Mr Van Niekerk to clarify Ms Modise’s question about the classification of the initial capital that had been invested into the company.
Mr Van Niekerk referred Ms Modise to his previous explanation on how investment classifications had changed, in line with the IFRS.
Regarding the possibility of compromising the company’s core mandate due to merging, Mr Matseke stressed that BBI was committed to maintaining its public responsibility after joining with Sentech. In fact, the merger was meant to strengthen the operations of these two state-owned entities. He suggested that when the new entity was formed, it would confirm its public mandate with the government to stay on track with the existing targets.
Mr Masetha agreed with Mr Matseke’s response, and emphasised that the intention to merge the two entities was to strengthen efforts towards providing broadband services to under-serviced areas of the country. The plan was to ensure that BBI’s services had the same reach as Sentech’s services. This was going to be achieved by allowing BBI to use Sentech’s signal towers. In simple terms, he explained that the intention was to ensure that where there was a radio signal, broadband had to be available. Thus, combining these two entities catalysed the process of providing broadband to under-serviced areas, especially considering that a radio signal was easily accessible across the country.
The Chairperson thanked Mr Masetha for his response, and asked Mr Matseke to address Ms Modise’s question about possible loss of staff due to SOC rationalisation.
Mr Matseke replied that SOC rationalisation did not result in the departure of skilled staff. In fact, the merger was a process of expansion which in turn created more jobs. He explained that in the 2019/20 financial year, the entity had retained 96% of its staff. The few individuals who had left the company had done so on the grounds of receiving better financial incentives elsewhere, and not because of dissatisfaction due to SOC rationalisation.
Mr Cloete said that Committee Members had to be mindful when dealing with this issue, and warned them of pre-empting the legislation process. He explained that although the Minister had made announcements on SOC rationalisation, there were legislative procedures that were meant to take place before the Select Committee could start deliberating on the issue. He asked for clarity on whether BBI treated the state as a customer or not, because in the presentation the company indicated it had experienced a growth in revenue, chiefly from the National Revenue, but had recorded a loss of revenue from anchor customers.
The Chairperson thanked Mr Cloete for his response, and asked if Ms Mokause had more questions.
Ms Mokause said her question concerning the details of the people who injected money into the company had not been adequately clarified. She said that it was difficult to understand the company’s expenditure, because the activities of the company were not clearly outlined. More details were needed on how injected money to the company was allocated to different activities.
In response to Ms Mokause’s question, Mr Matseke explained that of the cumulative total of R1.8 billion discussed in the presentation, R1.3 billion had come from the government. He detailed how the National Treasury had disbursed this money to the Department of Public Enterprises, who in turn had relayed it to the shareholder ministry. During this period, the shareholder ministry was still part of the Department of Public Enterprises. The R479 million balance of this amount came from the IDC.
He said that the money in question was used to purchase fibre from Eskom and Transnet. He explained that BBI owned the fibre that was strung on Eskom’s transmission lines, as well as on Transnet’s railway networks. The entity had also used the money to build new fibre routes, to acquire more network equipment, and to build a network operating centre at the company’s head office. He mentioned that to date, BBI was still using capital received in the 2011/2012 financial year. Therefore, the company was surviving on generated revenue to build and upgrade its system.
The Chairperson thanked Mr Matseke for his brief outline of activities carried out by the company. He acknowledged that currently it was impossible for him to detail all the operations of the company. He then requested him to draft and send a report to the Select Committee outlining how the company spent its money.
Ms Mokause interjected, and suggested that the report should include where the infrastructure was built according to provinces if possible. She also asked if Eskom was billing BBI, since the company’s fibre was strung on its network lines.
Mr Matseke thanked the Chairperson and Ms Mokause, and agreed to their request. He replied that BBI owned the fibre that was strung on Eskom’s network lines and Transnet railway networks, and therefore did not pay for its usage. However, the BBI paid these entities for maintenance, because it was Eskom and Transnet’s employees that had the health and safety certificates to work on high voltage transmission lines.
In response to Mr Cloete’s question about the decline of anchor customers, Mr Matseke said the drop in market prices for fibre had reduced the financial value of anchor customers to the company. This was worsened by the fact that whenever old clients renewed contracts with BBI, they bought fibre at reduced prices. As a result, anchor customers bought fibre from BBI at reduced prices, which subsequently minimised their value to the company. To overcome this, the company had looked for new customers who were going to purchase fibre at the most current market rate. He also explained that the company did not sell fibre directly to the government, but did so through the State Information Technology Agency (SITA), which was the main supplier of fibre to most government entities.
The Chairperson thanked Mr Matseke for his responses, and asked if BBI’s chairperson had any additions.
Mr Ngcobo said he did not have any specific remarks, apart from asking the Select Committee to help the entity to overcome its financial problems, especially by communicating with Minister Patel pertaining to the approval of converting shareholder loans to equity.
The Chairperson agreed with Mr Ngcobo, and requested Mr Masetha and Mr Simphiwe Gxotiwe, from the Department of Communications and Digital Technologies (DCDT), to provide feedback on the dialogue between Minister Patel and Minister Ndabeni-Abrahams. He also asked them to provide feedback on the merger, and to relay information to Minister Ndabeni-Abrahams about Eskom’s competition with BBI.
The meeting was adjourned.
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