Broadband Infraco Bill: Department Responses to public submissions

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
22 August 2007
BROADBAND INFRACO BILL: DEPARTMENT RESPONSES TO PUBLIC SUBMISSIONS

Co-Chairpersons: Mr Y Carrim (ANC), Mr C Wang (ANC)

Documents handed out:
Department of Public Enterprises Presentation
Broadband Infraco Bill [B26-2007]

Audio Recording of the Meeting: Part 1 & Part 2

SUMMARY
Public hearings had been held on the Broadband Infraco Bill, and the Departments of Public Enterprises and Communications provided their response to the public comments on the Bill, which focused on Infraco’s licensing, Infraco’s relationship with Neotel, and Sentech’s relationship with Infraco. In broad summary, the Department of Public Enterprises was of the view that the only logical way to ensure an expedited licensing of Infraco was to ensure that a deemed authority was given permission to own and operate Infraco’s infrastructure. Since Infraco was seen as a strategic Government intervention, such deemed authority would allow Infraco to contribute immediately to furthering national priorities, and would not detract from the Independent Communications Authority role. DPE did not regard the merging of Sentech and Infraco as an option, as it believed there were fundamental differences between the two, and the strategic government intervention in setting up Infraco. DPE believed that the relationship with Neotel should be government by the Electronic Communications Act.  The background to the matter was given. DPE proposed therefore that there should be a deemed licence and an amendment of the Electronic Communications Act.

Members questioned the likely time periods to amend the Act, discussed the principle behind independent regulators and the processes, the effect of amendments to the ECA, and whether the "deeming" provisions could be applied to an entity not yet in existence. Various legal advisors were asked to give their opinions. Further questions related to the likelihood of legal challenge, whether exclusivity was included in the legislation, leasing of excess capacity, and whether it would be possible to incorporate amendments in a Schedule to the current Act. Certain Members suggested that the State Law Advisors be asked for their comment. Sentech noted that there had not been any suggestion that it should focus solely on broadcast signal distribution and this perception was corrected. The Department was asked to confer with Sentech.  The Chairperson felt that the issue of scheduling was a policy matter, and that the DOC and National Treasury had to agree before the Committee could provide a view on the matter.

MINUTES
Broadband Infraco Bill: Department of Public Enterprises (DPE) Responses to Public Submissions
Ms Portia Molefe, Director General, DPE, and Ms Ursula Fikelipi, Director: Corporate Legal Services, DPE, introduced and explained the Bill, and gave a summary of the public submissions on the Broadband Infraco Bill. These related in the main to Infraco’s licensing, Infraco’s relationship with Neotel, and Sentech’s relationship with Infraco. Public comments largely came from major networks and regulatory agencies, who had in the main expressed support for the concept of Infraco.

The Committee had asked the DPE to respond to comments from the public that Infraco should be license, that the Bill should include a deemed licence provision and that Infraco should be licensed under the Electronic Communications Act (ECA). The DPE was of the view that the only logical way to ensure an expedited licensing of Infraco was to ensure that a deemed authority was given permission to own and operate Infraco’s infrastructure. Since Infraco was seen as a strategic Government intervention, a deemed authority allowed Infraco to contribute immediately to furthering national priorities, while allowing the Independent Communications Authority of South Africa (ICASA) to exercise its delegated authority.

Ms Molefe said that with regard to Infraco’s relationship with Sentech, submissions had suggested that Infraco should not infringe on Sentech broadband services, that Infraco networks should be limited to fibre optic and specific geographic areas, that Infraco and Sentech be merged and that Sentech be included in the Public Finance Management Act (PFMA). Ms Molefe said that the DPE did not regard the merging of Sentech and Infraco as an option. Given budget allocation and priorities, Sentech was fundamentally a broadcasting signal distribution company. Infraco on the other hand was a strategic Government intervention required to immediately introduce competition to the Information and Communication Technology (ICT) services market by providing catalytic broadband capacity at affordable prices.

In relation to the Neotel relationship, submissions had suggested that Infraco should be able to grant open non-discriminatory access to its network. DPE was of the view that this should be regulated by the ECA and the purpose of the Bill was to establish Infraco as a State Owned Enterprise (SOE). This was a commercial marketing arrangement that would ensure transparent pricing.

The DPE then reiterated its presentation from two weeks previously, noting the specific contents on the content of the Bill. The basis for the Infraco Intervention was set out, together with what Infraco proposed to do. The reasons why the DPE felt that licensing the second network operator (SNO) would not help, gave an example of Infraco long distance pricing, and then proceeded to discuss licensing issues (see attached presentation) in terms of the comments received from various stakeholders. Although Telkom, Sentech and the Mobile Operators wanted Infraco licensed through the normal process, this could lead to delays. DPE felt that if Infraco were to be tied up, the competitiveness of the sector would not be enhanced. A deemed authority to own and operate its infrastructure was in the view of the Departments of Public Enterprises and Communications (DOC) the logical way forward.

Ms Molefe proceeded to give the history of Sentech, noting that it focused on wireless access networks and Tier 2 application services. Funding was intended to support provision of broadcasting signal distribution but additional allocations over the medium term expenditure framework would accelerate the rehabilitation and digitization of broadcasting signal distribution infrastructure, and roll out of infrastructure for the World Cup. Its focus must be on digitization in the medium term. Merger of Sentech and Infraco was not considered an option.

In respect of Neotel, Ms Molefe pointed out that there was a commercial agreement between DPE and Neotel, which would be regulated. In practical terms, a default exclusivity would apply as Infraco was a subcontractor under the Neotel licence and Infraco would take at lest one or two years to build its own IP layer.

Ms Molefe concluded that Infraco was a strategic government intervention, required immediately, that it would provide only backbone national long distance fibre and undersea cable, and that there was general consensus that it be licensed. DPE suggested this must be done immediately through a deemed licence clause, and an amendment to the ECA.

Discussion
The Chairperson commended the Department for the responses. He asked that in regard to the option to amend the Electronic Communications Act (ECA); the DOC should state how long it would take to complete the amendment process.

Ms Mashila Matlala, Director :Policy, DOC,  stated that the whole process would take at least three months.

The Chairperson stated that he could not remember a single occasion where a Department presented its legislation on time. He suggested that they should be cautious and look to completing the Bill March 2008. He said that with regard to having the license deemed the parliamentary legal advisors should look into the matter.

Ms Molefe stated that Parliament would set up the legislation. If the policies were included in the legislation then parliament would have to amend the main body of the legislation. She indicated that there was some sensitivity around parliament attempting to dictate what an independent regulator should do. She cited the example of the attempts to increase the tariffs controlled by the National Electricity Regulator of South Africa (NERSA).
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The Chairperson summarised that here government took a decision to invest in electricity infrastructure, and Eskom had asked for an increase in tariffs. NERSA refused to do so, and the question arose whether government could instruct NERSA to allow the increase without undermining NERSA’s independence.

Ms Molefe stated that the Infraco’s model was moving towards an incentive based system which was aimed at improving efficiency. She commented that in respect of the electricity tariffs, it would have been possible to look at other similar regulatory systems in other countries, and analyse each rule in order to determine what was allowed. When regulators were established, matured and had a clear set of rules and guidelines there would be no need for government intervention unless there had been a clear policy mistake.

The Chairperson asked the DOC to state whether there was a vacuum in the ECA that did not provide for a state entity in telecommunications to get a license, noting that the State would be acting in the interest of the poor and disadvantaged, as opposed to the commercial drive of the private sector. The DOC should also comment on whether it occurred to them, when the ECA was passed, that all licensing would have to be done by ICASA. The Department should also state whether the ECA Amendment Bill would be required to be passed by March 2008, if the deemed licence provisions were to be accepted by the Committee.

Mr P Hendrikse (ANC) asked for clarity on whether this proposed Bill would deem a licence for Infraco. The alternative would be to amend the ECA and allow for ICASA to deem a licence. Clarity should also be provided on the purpose of amending the ECA.

Ms Matlala responded that in the ECA there were no company names, and the proposals that the Department was taking to Cabinet encompassed having a provision that would allow for the licensing of state entities in general, and that would outline the licensing processes. The provisions would therefore not deem Infraco itself to be licensed. The licensing process being suggested now in order to assist expeditious licencing of State Owned Enterprises (SOEs) would depend on the public comments and Cabinet's decisions. The intention of the ECA was to give licencing powers to the regulator, as the Minister was limited in issuing policy directives.

Ms Molefe added that the Department believed it was essential for there to be an amendment to the ECA which would allow for deeming of licences in respect of strategic interventions by the State. It was concerned that the usual processes would delay the matter. It should also be noted that Infraco would have a vacuum to fill unless the "deeming" provisions were passed. She said that Infraco was a subcontractor to Neotel under Neotel’s licence, owing to the fact that under the ECA Infraco was not allowed to provide infrastructure.

Mr Paris Mashile, Chairperson: ICASA, stated that the intentions of the state intervention were necessary. It should however be noted that the word "deeming" implied that the infrastructure was already in existence. It should also be noted that the ECA did not allow for exclusivity at all.

Mr Mashile said that in regard to Neotel, excess capacity could be leased to it because of the different providers such as Transtel and Easytel, and that was allowed within the ECA. ICASA could assist Infraco as long as there was a clause in the ECA that allowed for strategic intervention in order to address market failure. Therefore he suggested that the ECA should be amended by adding a clause which set out that the proposal was a strategic intervention by the State, aimed at lowering the cost of communication, allowing for wholesale distribution, and an open network provision which prevented exclusivity by one service.
 
Mr Hendrikse stated that he disagreed with the interpretation that "deeming" would imply that the infrastructure was already in existence

Mr Mashile responded that a good example would be Telkom, as this was a company that existed before the Telecommunications Act, and had to be incorporated into that Act with a deeming provision. Following this example, it would be incorrect to deem Infraco, as it had not yet been established. It was however possible to specify in the ECA that strategic intervention by the state was necessary in order to lower costs of communication and make provision for an open network.

The Chairperson called upon all lawyers in the room to provide insight into the matter.

Mr Hendrikse stated he strongly disagreed with the interpretation that was provided, and it was within the power of any legislation to state that in order for Infraco to be established the licence had to be deemed.

Mr Wang added that it was unnecessary to argue over the interpretation of the word "deemed", and he asked ICASA to provide a clearer definition.

A Departmental law advisor stated that agreed with Mr Hendrikse on the licensing matter. A good example was the Sentech licence, which was classified as a deemed licence, even before the establishment of Sentech.

Ms N Kondlo (ANC) asked for clarity from the Department on the licensing path they had chosen, which seemed to lay the Bill open to challenge.

The Chairperson responded that the matters were not necessarily mutually exclusive, and no decision had been taken.

Ms Molefe stated that Infraco’s Fixed Services Network assets (FSN) assets were not new, as they previously belonged to Transtel and Easytel, and that it was only the structure of Infraco that was a new entity. With regard to the issue of "deeming" she argued that the amendment of the ECA to allow for strategic intervention would cater perfectly for the situation. However, the DPE was not arguing on the question of a deemed licence but on Parliament's power to legislate.

The Chairperson stated that if the ECA did not agree with exclusivity, and the Department stated that they were abiding to all the laws within the ECA, then ICASA should provide a solution to the matter.

Mr Mashile responded that he unable to identify a section within the ECA that made provisions for exclusivity. If there were, then other organisations would state they too had the right to exclusivity.

Ms Molefe responded that the FSN assets were no longer under the authority of Transnet and Eskom, therefore leasing excess capacity was not an option. There had also been confusion around the exclusivity issue. It should be noted that the commercial arrangement that was made with Neotel was purely a marketing arrangement. The Department understood that total exclusivity was illegal, and the arrangement that was made with Neotel was to the effect that Neotel was the marketing agent for Infraco’s services, and the price in which it sold the services to interested parties was at a reasonable price.

Mr Mashile stated that ICASA only operated according to what had been stipulated within the ECA, and no other legislation. He clarified that ICASA was not suggesting that Infraco should not be licenced, but merely making sure that any licensing was done was in accordance with the Act.

The Chairperson stated that there were many state owned entities that were governed by multiple acts. A good example would be Eskom, which was an entity that was answerable to the Committee, but also had to operate in accordance with the PFMA. Clarity should be provided on whether it was possible to have the amendment attached as a Schedule to the Act, in the event that Cabinet approved the amendment.

Ms Matlala stated that there would be no problem with regard to such an amendment as long as the various parties came to an agreement.

Ms Lisa Thornton, representative of Universal Service and Access Agency of SA (USAASA),  stated that she agreed with DOC’s opinion on the matter, and noted that the ECA did not have a higher status than any piece of legislation. Therefore it was up to Parliament to make the correct legislative decision.

The Chairperson asked the Department to think about the various issues and whatever was outstanding could be discussed outside of the meeting.

Dr S Van Dyk (DA) suggested that the Department should approach the State Law Advisors in order for there to be a proper and professional opinion on the matter.

Mr C Gololo (ANC) asked that Mr Mashile should look at the comments given by stakeholders, including the Competition Commission, and give his opinion.

Mr Mashile stated that as long as the Act was amended there was nothing ICASA could do

Ms Molefe stated that with regard to scheduling, the benefit was that if there was an agreement reached between DPE and DOC, then DPE could look into the risk of removing the deeming provision the amendment was a schedule attached to the act.

The Chairperson stated that it was important that all parties conferred with ICASA in order for there to be a consensus. He asked DPE to comment specifically on whether they foresaw any threat of legal challenge, and whether the Department had conferred with anyone who was likely to challenge the Bill in Court.
 
Ms Molefe stated that the Department had looked at this and believed that if any legal challenges were made, then the Department had a strong case.

Mr Nkateko Nyoka, Corporate Services, MTN, stated that he believed the arguments in relation to the deeming process were correct. Ms Molefe had argued correctly, in his view, that the issue was not about labeling, but about finding the appropriate mechanism.

Mr Dingane Dube, Executive Government Regulator: Sentech,  stated that there was little he could say on any agreements between  DOC and the DPE. He noted that Sentech had stated that it had no objections to Eskom diversifying from electricity to communications, and there was nothing wrong with Sentech doing broadcasting signal distribution. However if a decision was taken that Sentech was to focus only on broadcast signal distribution, then it would be the first time that Sentech heard of the matter. With regard to scheduling, Sentech had sought legal opinion from a Senior Counsel regarding its reclassification, and this opinion had suggested that there was nothing wrong. He added that the Competition Commission stated that it was important, for the purposes of anti-competitive behaviour, that Infraco was classified as a Schedule 2 entity under the PFMA. Then the same would have to apply to Sentech, as it would be providing similar services.

Mr Hendrikse stated that there were too many opinions being proferred in this meeting.

Ms Kondlo asked for clarity on why the scheduling issue was raised with the Department of Public Enterprises instead of the DOC.

Mr Dube stated that the issue of reclassification was not raised for the first time and was not being imposed on the Committee,  as these issues had formed part of Sentech’s written and oral submission to the Committee.

The Chairperson stated that he had no problem in changing Sentech’s scheduling. This issue however was a policy matter, and DOC and National Treasury would have to agree. Therefore the Committee could not take a view on the matter. He also noted that there must be distinct clarity on the roles of Infraco and Sentech.

Ms Molefe responded that DPE would be happy to provide further clarifying definitions on the roles of Infraco and Sentech. She also made the point that the DPE had not stated that Sentech would "solely" focus on broadcast infrastructure, but had stated that Sentech would "fundamentally" focus on broadcast infrastructure.

The Chairperson stated that where possible the Department should confer with Sentech.

The meeting was adjourned.