Broadband Infraco Draft Bill; South African Express Draft Bill: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
16 May 2007
BROADBAND INFRACO DRAFT BILL; SOUTH AFRICAN EXPRESS ENABLING DRAFT BILL: BRIEFING

Chairperson: Mr Y Carrim (ANC); Co-Chairperson: Mr C Wang (ANC)

Documents handed out:
South African Express Bill PowerPoint Presentation
Broadband Infraco Bill PowerPoint Presentation
South African Express Enabling Draft Bill
Broadband Infraco Draft Bill
Broadband Infraco Bill [B26-2007]

Audio Recording of the Meeting: Part1 & Part2

SUMMARY
The Department briefed the Committee the South African Express (SAX) Enabling Bill and the Broadband Infraco Bill. The SAX Bill is intended to provide flexibility for funding and private sector involvement, in order for SAX to be hopefully turned into a separate public company. The Broadband Infraco Bill intends on expanding broadband access to underdeveloped areas, and ensuring that the bandwidth requirements for specific projects of national interest are actually met. The SAX presentation provided an overview of SAX and noted the implications of the Bill. The Broadband Infraco presentation focused on the purpose of the Bill, the servitude rights for Infraco, expropriation by the Minister, and the Bill's implications. There will be a public hearing on 20 June 2007.

During discussion on the SAX Bill, members questioned the profitability of the entity and whether the entity should rather be privatised, the operating structure of the entity, and its scheduling as a public entity within the Public Finance Management Act. Besides asking if the Infraco Bill would reduce the cost of broadband, questions were asked about land expropriation, official responsibility for this, and compensation to private landowners as well as the scheduling of the public entity.

MINUTES
South African Express (SAX) Enabling Bill briefing by Department of Public Enterprises (DPE)
Mr Andrew Shaw (Deputy Director General: Transport Enterprises) accompanied by Ms Ursula Fikelepi (DPE Legal Services), presented. He stated that SAX is a regional airline, which operates on a smaller gauge aircraft than those operated by mainline airlines. Government recently decided that SAX should be a stand-alone state-owned enterprise rather than a subsidiary of South African Airways, because integrating SAX into SAA may have competition implications. Also, it will allow Transnet to focus on its core business, in order to avoid a potential negative impact on its balance. The draft SAX Bill had been approved by Cabinet on 18 April. The briefing gave an overview of SAX and looked at implications of the Bill (see document).
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Discussion

The Chairperson pointed out that due to the fact that the two Bills had not yet been officially introduced into Parliament, the public hearing on the Bill would be delayed until 20 June. The Department had called for public comment on the gazzetted versions before them and he asked the Department to submit to the Committee all the submissions they receive, so that Committee can analyse the issues at hand.

Mr Hendrickse (ANC) asked the Department to provide clarity on the different types of services that SAX provides.

Mr Shaw replied that apart from being a passenger service airline, SAX also provides a freighting service, and uses the belly area of the airline for the freighting service. Other commercial airlines are driven by the fact that they are passenger service airlines, and have no space in the belly area available for freighting.

The Chairperson asked the Department to state the difference between SA Airlink and SAX, and also to comment on the performance and profitability of both airlines.

Mr Shaw replied that Airlink is owned by the private sector whereas SAX was held as part of the Transnet group together with South African Airways (SAA). It was important to note that the two airlines are in competition with each other. In terms of performance, SAX has the capacity to operate competitively and has the ability to be profitable, whereas Airlink has been profitable for some time and since it is privately owned, there is a dividend return to shareholders.

Mr Van Dyk (DA) stated that SAX has been held by Transnet and was not operating on a profitable basis. However there had been an ongoing trend with Transnet, where they transferred non-profitable entities back to the State. Transnet was now intending to transfer its SAX liabilities to the State and ultimately the taxpayer. Why was privatisation of SAX not considered as an option? The Department should state whether or not they have thought of privatizing the entity. According to the Department's budget vote 30 document, SAX was operating at a loss.

The Chairperson stated that he had heard reports that SAX was operating on a profitable basis, however there needed to be an investigation into what Budget Vote 30 says on the matter.

Mr Shaw replied that SAX wanted to separate from Transnet because Transnet wanted to focus on its core businesses, such as rail and ports. The positioning of some of the businesses within Transnet did not make sense, and South African Airways (SAA) and SAX had been identified as two of those businesses, because their focus was on passenger services, and not on freight. With regards to the financial viability of SAX, the situation is being analysed, and part of the challenge is to identify what costs and revenues need to be split at the margin in the separation of the businesses. SAX strongly believes that once separation takes place, the business will once again become profitable.

Mr Hendrickse stated that he had heard reports that SAX was doing a good job and asked the Department to provide clarity on their operational structures.

Mr Litha Mcwabeni (DPE: Deputy Director General: Corporate Strategy & Structure) stated that according to last year's operating reports SAX was doing well, and this is a factual issue. The issue that needs to be investigated further is the strength of the entity’s balance sheet which did not help the situation due to its history at Transnet. It was a fact that Transnet did not seriously capitalize SAX. SAX continued to make a significant profit despite the weaknesses of its balance sheet. Therefore it was factually incorrect to state that SAX is not making a profit. SAX continued to make a significant profit despite the weaknesses of the balance sheet. Therefore it was factually incorrect to state that SAX is not making a profit.

The Chair ruled that that Mr Mcwabeni should provide derailed information on the SAX situation in writing. Also a representative of SAX should appear before the Committee to provide clarity on the entity's operational structure

Mr Shaw replied that in terms of privatization, SAX is in the process of going through separation initially. SAX's planned operations in Africa are within the mandate of the state. SAX would in future explore structural possibilities which may or may not work, however SAX believed that currently the entity's mandate falls in line with the state’s mandate. With regards to profitability, it is clear that SAX is profitable, however the issues of profitability can only be fully analysed once the separation had taken place, and the cost structures that are shared were correctly divided.

The Chairperson stated that at this stage it was correct that SAX should be retained in state hands, as one needs to determine whether the airline is profitable. Privatization can only take place once it has been determined that the airline is profitable. An issue to consider is that of partnership with the private sector, and lessons need to drawn from such partnerships in order to determine the way forward.

Mr Mcwabeni pointed out that in terms of operations, there had been concerns that SAX was not covering all the smaller towns. It was important to note that SAX did cover most of the smaller towns. The privatization issues are secondary issues, the debate should not be about privatization, but how the airline can efficiently provide services to smaller towns, and all of Southern Africa. Privatization did not necessarily guarantee greater investment or services from the private sector.

Mr Van Dyk stated that it is convenient for a department to say that a certain function falls within its mandate. However, one should take into account the interests of the tax payers, and the fact that these funds could have been better allocated elsewhere. There should be a debate regarding the interests of the taxpayer.

Mr Hendrickse stated that SAX was a very profitable airline; however one needs an airline that would serve all areas even the unprofitable areas.

The Chairperson stated that most of the issues raised by Mr Van Dyk had already been covered, and there had been many engagements with the Department and the state owned enterprises. The Department had focused on the efficient use of funds. He then ruled that the Committee was not going to rehash debates on issues that had been covered exhaustively.

Mr Hendrickse suggested that SAX needed to appear before the Committee, before the public hearings. He asked if SAX has an annual report and whether the Bill going to be similar to the SAA Bill as amended.

The Chairperson asked the Department to provide clarity on what type of entity it would be within the Schedules of the Public Finance Management Act (PFMA). Also why had it taken so long for the Bill to be gazetted?

Ms Fikelepi responded that a financial administrative matter within the Department was partly responsible for the delay and the recent spate of public holidays had played a major role.

The Chairperson asked the Department to provide clarity on the scheduling of the entity.

Ms Fikelepi replied that the scheduling discussions were still underway with National Treasury and scheduling would entail an amendment of the Public Finance Management Act. Since the categorisation issues have not yet been resolved, the amendment cannot take place at this stage.

The Chairperson stated that issue of Scheduling is one that cannot be resolved by Parliament, and the matter needed to resolved before the final Bill is brought to Parliament.

Ms Fikelepi replied that all the borrowing powers of the entity would be subjected to the borrowing powers under the PFMA. When it comes to scheduling and classification under the PFMA, then the matter shifts focus to the extent to which an entity can borrow off its own balance sheet.

The Chairperson pointed out that under the PFMA, the only issue relevant to the distinction between a Schedule 3B or Schedule 2 entity, as it applied to this Bill, was in respect to its borrowing powers.

Mr Hendrickse hoped that the indecision about whether the entity should be listed as a Schedule 2 or a Schedule 3B was not going to delay the tabling of the Bill.

Broadband Infraco Bill briefing by DPE
The presentation was made by Ursula Fikilepi, Mr Cornelius Groesbeek (Advisor to the Department on Infraco) and Mr Litha Mcwabeni. The presentation focused on the purpose of the Bill, the servitude rights for Infraco, expropriation by Minister, and the implications of the Bill (see document).

Cabinet had confirmed and approved the establishment of Infraco as a state-owned enterprise on the 18 April 2007 and also approved the submission of the Infraco Bill to Parliament. The purpose of the Bill was to provide for the acquisition of the Infraco shareholding by Government and for the future conversion of Infraco into a public company. In terms of servitudes, the Bill extended Eskom’s servitude to electronic communications, and Eskom and Transnet were required to allow Infraco to use these servitudes in order to provide electronic communication network services. The conversion of Infraco into a public company would enable Infraco to access funding from the private sector. This was important, given the dynamic nature of the sector and the critical role of such infrastructure and services in the South African economy.

Discussion
Mr Wang (ANC) asked Infraco to state how the Bill was going to affect the ordinary person in terms of bringing down the costs of broadband.

Mr Groesbeek replied that if one were able to address the issues of back-haul and international connectivity costs then the cost of broadband would be brought down.

The Chairperson asked when they anticipate Infraco getting a licence.

Mr Groesbeek replied that Infraco still needed to be licenced, and it is waiting for the Department of Communications.

The Chairperson asked for clarity on its organizational structure.

Ms Fikelepi replied that Infraco was established from an existing Eskom subsidiary, there is a board that has been appointed, however there is not yet a large number of staff.

Mr Gololo asked which minister would be authorised to expropriate land

Ms Fikelepi replied that the Minister of Public Enterprises is also authorised to expropriate land, and his power to expropriate would be exercised in terms of the Expropriation Act.

Mr Wang asked the extent to which expropriation is going to affect Infraco’s operations.

Ms Fikelepi responded that Infraco is not looking at expropriating land at all, as the existing assets exist on land that is owned by Transnet. Expropriation is merely a mechanism which is intended to provide flexibility. It would limit the expropriation of land as much as possible.

Ms N Kondlo (ANC) asked what are unregistered rights (related to expropriation), and whether state owned land would be expropriated and, if not, who would be responsible for compensation.

Ms Fikelepi replied that the land expropriated would not be state owned land; the land potentially to be expropriated is unknown. The rationale for the expropriation is intended to protect third party land owners. In terms of unregistered rights, due to the fact that the land expropriated is unknown, not all servitudes will be registered against the title deed. Therefore the expropriation processes tends to take a long time, as detailed investigations into who owns the land have to be undertaken.

Mr Van Dyk stated that according to the Bill, servitudes may be required for railways and transport roads. However one should consider that expropriation could lead to court cases, should be handled very carefully.

Mr Wang stated that Infraco should provide some examples of expropriations at a public hearing.

Mr E Boskati (Parliamentary researcher) asked if the Infraco company would be listed as a Schedule 2 or 3 entity in terms of the Public Finance Management Act (PFMA). With regards to the licensing of Neotel, it was noted that Neotel would be given privilege of selling to consumers for a period of four years. What would happen to Neotel after the four years? Mr Boskati also asked for comment on the role of the Electronic Communications Act (ECA).

The Chairperson stated that issues surrounding whether the organization should be listed as a Schedule 2 or 3 entity are a little complicated, as various departments have different views on it. The issues are still being discussed, and the details would be available soon.

Ms Fikelepi added that part and process of the Bill, is to determine whether Infraco’s borrowing powers would be subject to the PFMA. That Act applied to all public entities and its purpose was to regulate public finance and borrowing. Scheduling applied to the financial policies of the entities.

Mr Mcwabeni noted that the PFMA did not allow for migration from Schedule 3 to Schedule 2 status. Infraco recognised the points which National Treasury has made about the risks to the public fiscus, and the Department of Public Enterprises does agree with them as the points become amplified in an organisation with no financial history.

Ms Fikelepi responded that in terms of licensing the ECA had been set up to regulate licencing, and Infraco would be required to obtain a licence that will fall into the ECA regulations.

Mr Groesbeek added that in terms of licensing, after all the broadcasting licensing acts had been repealed, all existing licensees have to have their licences converted to an equivalent ECA one. A deal has been made that Infraco can begin to operate without a licence, as it is subcontracted to Neotel, and the Neotel licence that was granted under the Telecommunications Act allows it to appoint subcontractors that would provide services to it. In the agreements, it was stated that Infraco would provide services exclusively to Neotel for a period of two years or until Infraco becomes licensed.

Meeting adjourned.