Sentech and Telkom briefings

Meeting report

COMMUNICATIONS AD HOC COMMITTEE
11 June 2004
SENTECH AND TELKOM BRIEFINGS

Telkom presentation
Sentech presentation

SUMMARY
Telkom reported to the Committee that the Group's operating revenue had increased by 8.8% for the 2003/2004 financial year, while operating profit had increased by 39.5% due to better cost-saving methods. It had spent R24 billion on Broad-Based Black Economic Empowerment (BBBEE) since 1997, and R5 billion during the 2003/2004 financial year. It was the largest levy payer in the country. Telkom had also supported South Africa's bid to host the Square Kilometre Array telescope.

Sentech urged that South Africa start with the move from an analogue broadcasting system to a digital system, as the country's broadcasting infrastructure was old and in a poor state. It presented a proposal towards digitalisation, including costing schedules.

MINUTES

Telkom submission
Mr N Kekana (Group Executive: Regulatory and Public Policy) presented PowerPoint slides 1-7. He said that Telkom had created wealth for thousands of shareholders, of which many were from disadvantaged communities. A detailed report on the budget would be submitted at the annual reportback. Telkom urged that licensing for a second operator should be granted without delay as competition would only benefit consumers. As the regulatory body, ICASA set prices and costs were continuously increased below inflation rates.

Mrs N Vokwana (Chief Executive Officer of the Telkom Foundation) presented slides 8-12 and focussed on social affairs, information, education and bridging the digital divide. One hundred schools had benefited from the Telkom Foundation setting up computer centres. Similar initiatives were key to the organisation's commitment to bridging the digital divide.

Mr N Kekana presented slides 13 and 14, which dealt with job creation. He commented that the success of Telkom was indicative of a healthy economy.

Sentech submission
Mr G Maroeme (Corporate Executive) said that he would raise matters relating to strategy and not report on Sentech's past. South Africa needed to launch its own satellite as thousands of rands had gone to International service providers.

Sentech urged that a digitalisation strategy and a migration plan towards digitalisation be drawn up. It informed the Committee of the total user digitalisation cost for the country, which stands at R3.9 billion. About 7 million out of the 9 million households in South Africa had televisions. The cost of a top set box was about R468 and the cost for the antennae was R100. Transmitter costs amounted to R153 million. Sentech proposed the following digitalisation plan: that 50% of a metropolitan area such as Johannesburg 'go digital', then 50% of the non-metropolitan area. Thereafter, other metropolitan areas. To guide the industry towards digitalisation, a National Digitalisation Policy and a National Digital migration policy were needed as a matter of urgency. Sentech felt that various restrictions should to be lifted.

Discussion
Mr R Pieterse (ANC) asked when Telkom's Annual Report would be submitted and why the reconnection cost of pre-paid systems were so high (R158) when there was hardly any labour required for the reconnection. The poorest people were hit the hardest due to disconnection that followed after 51 days of recharge delay. He also asked why Telkom had retrenched 1 000 of its staff last year if it was so concerned about job creation, and why there were more job losses pending when the company had earned huge profits.

Mr M Johnson asked Mr Kekana of his experiences of privatisation and why Telkom's rates were so much higher than international norms.

Mr M Mohlaloga commented that the rental of R50.80 per month was 78% above the international average. This defeated the objects of service delivery. He asked how many of the 2.5 million residential customers had been disconnected. He said that the rollout of call centres would create more jobs. He also asked how much money was spent on the pursuance of litigation. Prices to other users were unfair, as these users should have had to pay wholesale prices only.

Mrs M Smuts (DA) asked why, if ICASA was meant to be the regulatory body, Telkom objected so fiercely to ICASA's 3% rate; why the Minister had gazetted a 1.5% rate and about the influence on government, as one of the big shareholders, on the rate. She also asked whether Telkom had left any room for a second competitor in the telecommunication market; what the IP services entailed, and what would be the impact on Telkom if its appeal before court did not succeed.

The Chairperson asked for Telkom's comments on the appeal to grant 'voice-over IP' to Sentech, and whether Telkom had any information on shares sold by Malaysian interests.

Mr Kekana responded that many questions were of a policy nature and some required much detail. He suggested that questions on figures be discussed at a follow-up meeting and that shareholders themselves would best answer questions regarding shareholder behaviour. Voice-over IP was an IP network used by everyone involved in networking. Legislation afforded such voice networks to Telkom only, and disallowed any other service provider to do the same. Detailed reports on prepaid disconnections would be provided at the annual reportback meeting. Almost 56% of disconnections were initiated by Telkom due to non-payment, and 44% were customer-initiated. Many customers were moving from the account system to the prepaid system.

Mr Kekana commented that government's privatisation strategy had worked well and that the restructuring was successful. R34 billion had been spent on modernising the network and restructuring the enterprise.

Mrs Vokwana commented that job creation was key to Telkom's functions and explained the three aspects of job creation: the creative 'Social Plan' which looked at issues of training; investment in the Broad Based Black Economic Empowerment Plan; and the role of the Skills Development Levy.

Mr Kekana commented that the building of the Telkom network had employed many people. The company scored very high in enterprise development on the 'ICT Charter Scorecard'. It had also created many opportunities for the telecoms industry, and was a participant in the interim consortium for the Cable Access and Unregulated Services. Figures relating to legal fees were not at hand, but would be submitted at the next meeting. The markets would create opportunities for a second operator as it had done for the mobile phone sector. Telkom was confident that there was room for everyone in the market and welcomed the government's initiative on the administration of prices.

Dr G Celli (Telkom Executive: Regulatory and Public Policy) commented that although revenue from fixed line operators had only increased by 4.6%, profit had increased by much more due to improved efficiency, improved management services and paying off debts. Profits were due to a decrease in costs and not an increase in revenue.

Mr Kekana commented that Telkom was subject to independent regulatory reviews and he urged Members to built on what Telkom had achieved. The country's largest Call Centre competitor was India. South Africa was a stronger better competitor due to considerations such as time, language, location, etc., in relation to global markets. Although call centre jobs were important for poverty alleviation, it could not create quality employment, as it did not built capacity in people.

An ANC Member asked how Telkom disseminated information on skills development, social development and other opportunities. She also questioned where the 100 schools that received computer centres, were situated.

Mr Kumalo asked why the Chief Executive Officer earned less than other executive office bearers, as this is not a trend in other companies - and why Telkom vehicle drivers were such bad drivers. He also questioned why Telkom was withdrawing from Nigeria and how this would impact that country. He further questioned how many black people were employed and at what levels, and why most of Telkom's services were in urban areas. He also queried why certain adverts on television that focussed on the rural black people's use of Telkom's services, had been discontinued.

The Chairperson asked the actual reason for repaying connection fees every time users were disconnected. On this issue, Telkom was not competing well with mobile network providers.

Mr Kekana responded that the Board had decided on payments of Boardmembers and thus could not comment. The key activity of Telkom technicians was telephone repairs and not driving; therefore they could not be expected to be the best drivers on the road! Telkom had not withdrawn from Nigeria, only from the Vodacom Consortium in Nigeria, as relationships between the two companies had soured.

Mrs N Vokwana responded that Telkom opportunities and the activities of the Foundation were regularly advertised in the media, on radio and television, and that reports on Black Economic Empowerment were regularly submitted. Although Telkom was a country-wide company, the activities of the Foundation focused on rural black woman. Some 20 computers were donated to 100 schools for the establishment of 'Super Centres'. These Centres were spread out nationally with ten per province, with ten extra Centres for the Northern Province. An extra 50 schools per province were serviced by the Foundation in various ways.

Mr Kekana and the Telkom team were excused from the meeting.

Mrs M Smuts commented that the country needed to start digitising, as 2020 was the deadline for "digitalising the globe".

Mr R Peterse asked why certain areas still struggled with weak signals, even though people were paying for services.

Mr L Johnson asked whether South Africa had the necessary human resources to implement digitalisation. He urged corporations like Sentech to partner with local municipalities in rural communities and train learners with skills needed for the digitalisation process.

A Member asked to what extent the wireless service would help to overcome blackouts in certain area, and about the financial implications of such a service.

Mr E Collar asked about the nature of existing relationships between ESA and Sentech in relation to the training of graduates.

Mr Gladwin Maroeme responded that a good relationship existed between ESA and Sentech, and that Sentech employed graduates of ESA. Digitalisation would solve the weak signal issue, but due to the national nature of the issue, Sentech could only submit proposals on the matter. A National Digitalisation Policy framework was urgently needed. The decoders for digitalisation would be manufactured in South Africa, which would contribute to job creation. Relationships with local municipalities were in place as Sentech had a good spread throughout the country.

Mr G Maroeme said that Sentech needed an injection of funds as it could only spend R150 million on networking, versus Telkom's R24 billion. Sentech hoped that the Convergence Bill would help in some way.

Mr J Mjwara (Deputy Director-eneral: Science and Technology Department) said that the problem with Sentech funding was due to it competition with other more pressing social needs.

As a state-owned enterprise, Sentech needed to raise its own funds in order to ensure sustainability. PFMA did not stunt business as indicated by Sentech. Provisions in PFMA enabled Sentech to apply for exemption from certain restrictions.

A Task Team had been set up to brief the Minister on the process of international digitalisation. The first international digitalisation conference was held in May 2004. Agreements were made to harmonise the processes between Europe and Africa. The global progress would be re-looked at in 2006.

Mr J Mjwara commented that estimated costs for digitalisation would amount to R45 billion over 20 years and that digitalisation would not solve all problems. As the analogue system and the digital system both had to exist side by side for 20 years to cater for people who do not move to the digital system, transmission costs would almost be doubled. This double expense and activity would be very heavy on the industry. Ways needed to be found to lower the cost of digitalisation. Discussion on the matter would be wrapped up by 2006. The markets should reach consensus on issues of standards.

Mr Kumalo asked how Multichoice would impact on competitiveness, and whether problems with capacity existed.

Mr Maroeme responded that digitalisation was an ICASA issue as Sentech only installed transmitters. He was not sure about Mr Mjwara's figures and warned that the country might not be able to broadcast in 2006 due to the poor state of the old infrastructure. He urged the Committee to speed up digitalisation as Japan had done, so that South Africa would not be left behind.

Mr J Mjwara agreed but cautioned that blanket digitalisation could leave people without services. All these issues needed to be addressed in policy discussions, and solutions needed to found to address practical concerns.

The Chairperson concluded that South Africa should migrate towards digitalisation, but needed to map out how this would be done and the processes to be followed.

The meeting was adjourned.