Infraco licence: Discussion with ICASA and Infraco; Denel & Safcol Quarterly Reports

Meeting report

Infraco Presentation
Mr N Mhlabane, Broadband Infraco (Infraco), noted that the Electronic Communications Amendment Act enabled the licensing of this entity. Infraco's aim was to provide affordable access to long-distance electronic communications network infrastructure, and broadband communication connectivity services and products. Broadband Infraco would thereby assist in making available capacity,  and would lower the costs of network infrastructure, which were currently impeding private sector investment and the innovation of electronic communication services.

Infraco was put in place as a result of Government's realisation that there was a shortage of sufficient players in the national long-distance fibre-optic network and international connectivity. Infraco was a member of an international consortium which was comprised of various operators around the world, including major telecommunications operators. Infraco's aim was to assist in eradicating this bottleneck in international connectivity, as well the national long-distance network. This mandate was qualified in the Broadband Infraco Act, which set out that the mandate was to fund the availability and quality of access to electronic communications, including access to underdeveloped and underserviced areas, through the provision of Electronic Communication Network Services (ECNS) and Electronic Communications Services (ECS). When the regulator put the Broadband Infraco Act in place, it aimed to ensure that the price of broadband would come down, so that South Africans could enjoy the benefits of cheap broadband. These benefits extended to many areas of the local economy and could also play a role in improving the lives of the average South African, through concepts such as e-health and e-education. An ECNS license would enable Broadband Infraco to construct, maintain and construct fibre-optic networks across South Africa. An ECS license would allow it to operate that network.

Discussion
Dr G Oriani-Ambrosini (IFP) asked what the respective licenses (both ECNS and ECS) empowered Infraco to do.

Mr Mhlabane answered that the ECNS license enabled it to construct and maintain fibre-optic networks across South Africa. Without an ECS license, however, it would not be able to operate that network.

Ms M Mangena (ANC) asked whether Infraco would be of any benefit to research institutions.

Mr Mhlabane answered that it was currently limited to providing services only to other licensed operators or exam entities. As a result, if projects of national interest were to be rendered by unlicensed exam entities, Infraco would require an ECS license to provide these services.

Dr Ambrosini asked whether Infraco had changed its business plan.

Mr Mhlabane answered that no aspect of its business plan had been changed.

Ms Ursula Fikeletsi, Head of Legal and Governance: Department of Public Enterprises, added that the Department had approved the business plan and that, to the best of her knowledge, no aspect of this business plan had been changed.

Independent Communications Authority of South Africa (ICASA) Presentation
Mr Fungai Sibanda, Councillor, ICASA, said that the Committee that had been mandated to look into the licensing of Infraco had submitted its report to the  ICASA Council. The Council decided, in its meeting held on 5 October 2009, that Infraco should be granted an ECNS license. The ECS license was, however, not discussed at this meeting, as the result of the Minister's intention to amend a policy directive around this issue. This policy directive was issued in terms of the Electronic Communications Act. That Act obliged ICASA to consider all relevant policy directives. This policy directive had been gazetted by the Minister and was now being consulted on. Legal issues around the issuing of this license were also being considered.

Discussion
The Chairperson asked  ICASA to explain, firstly, why it had not as yet granted Infraco the ECS license and, secondly, whether it would or would not be granting it. If it was not to be granted, then the Committee wished to hear the reasons for this, and also to hear what the legal issues were that prevented ICASA from issuing the license. She asked what had been the contents of the policy directive, and what was in the Gazette.

Mr Sibanda replied that he was now in possession of the amended policy directive and would provide the Committee with it.

The Chairperson asked how independent ICASA was from the Minister, and why ICASA had allowed an intended policy directive to hinder it from issuing the license in question.

Mr Sibanda answered that, according to the Electronic Communications Act,  ICASA was obliged to consider policy made - as well as policy directives issued - by the Minister.
 
Mr Mhlabane said that, as it was not the final policy direction,  ICASA need not factor it in when considering the license application. Even if it were to become policy, it would not be binding on ICASA, as ICASA would be able to make an independent decision around it.

The Chairperson asked the Department of Public Enterprises whether it had engaged with the Department of Communications to resolve this matter.

Ms Fikeletsi answered that the Department felt that Infraco should be granted an ECS license as it fell within its mandate to provide electronic communications services. The Department had engaged in discussions around this matter with the Department of Communications.
 
Safcol Quarterly Report Presentation
Ms Gerome Moloi, Chairperson, Safcol Board, said that there had been no significant changes to Safcol’s structure in the year under review although one its companies had been deregistered. There had been a degree of instability within the organisation as a result of the different directives issued by the Minister regarding its possible privatisation. This resulted in Safcol finding it difficult to conclude its five-year corporate and business plans. Safcol had, however, made significant inroads in the area of transformation. The global financial crisis had also affected it, particularly in the area of outside management control. In order to address certain weaknesses at Board level, two additions were made to the Board. Board attendance had been satisfactory, as was the sub-committee work. With the five-year timeframe it had been granted to reposition itself, Safcol felt confident that it could play a more important role, particularly around rural development. To this end it had started development initiatives with communities around its plantations. Safcol had had a clean audit report and had also addressed the non-compliance issues it had had in the previous year.

Regarding its shareholders, most of the interaction it had had with the Department had been positive. Safcol had also lent its support to the Department - as well as engaging in discussions with it - around its consideration of creating an agency which would oversee the forestry environment. Though interaction with land claimants was not an area in which Safcol enjoyed great strength, it was one that it worked to improve. Despite Safcol posting a profit for this period, it felt its financial position to be under stress as a result of the number of projects it wished to initiate. An added factor was that Safcol had needed to re-evaluate its terms of payments, because of the challenges its clients were facing. One of the three critical issues that it felt needed to be discussed was that of Safcol's future in relation to the possible privatisation. Another was its inability to fast-track issues relating to land claimants, as it relied here on the Department of Land Affairs. It also felt that there was a need to take a closer look into expanding into other countries so as to enhance job-creation in the Southern African Development Community (SADC) region. Safcol was, despite its challenges, satisfied with the direction in which its current management had steered the group.

Mr S Radebe, Audit & Risk Committee Chairperson, Safcol, said that factors which affected Safcol's profitability were the economic downturn, the effect of fires, lower sales volumes, an increase in land claims and a decrease in land made available for forestry. Highlights included an increase in its fair vale adjustment, a foreign exchange gain on the revaluation of the IFLOMA loan, an increase in debtors' book as a result of the decrease in sales volumes, payment of retrenchment costs due to corporate restructuring and an increase in assets (stock) due to lower sales volumes. Profit Before Tax (PBT) had increased by 11.6% while the net asset value increased by 25.6%. There had also been a 10.4% increase in Return on Equity (ROE) as well as 1.2% increase in investment income. Assets had grown at the expense of cash.

Mr Kobus Breed, CEO, Safcol, said that, in terms of operations, Safcol's main challenge lay in ensuring that the issues around fires were resolved. It had also received instruction from its shareholders to maintain and grow its assets while also protecting the position of land claimants and assisting in the economic empowerment of surrounding communities. Management and employment equity were areas which Safcol needed to look closer into, as it was an industry that was largely white male-dominated. 

Discussion
Ms G Borman (ANC) asked how long it took Safcol to settle land claims, and how many claims it had on its books. She also asked about the monitoring of debts, and what had been the cost of having the privatisation process on hold.
  
Mr Radebe answered that 61% of Safcol’s holdings were under land claims. These were, however, at different stages within the process.

Mr P Chetty, Acting Chief Financial Officer, Safcol, said that Safcol was in the process of recovering all its outstanding debts.

Mr Breed added that the privatisation process had been stopped by the Minister in May 2008. The cost was therefore included in the financial statement.

Mr S Van Dyk (DA) asked what effect the Shannon and Abacus settlements would have on Safcol's financial position. He asked what had been the motivation behind the R30 million in bonuses paid out to employees and what effect this would have on its finances.
 
Mr Breed answered that the financial impact of these settlements would hopefully be kept to a minimal. The Loyalty and Fire Bonuses were once-off bonuses. The Loyalty Bonus was paid to staff to incentivise them to stay with the group during the uncertain period of privatisation talks. The Fire Bonus was paid out to people directly involved in the recovery of burnt timber. Normal bonuses were paid out to all employees and were based on the basis of company's performance.
 
Mr L Greyling (ID) asked whether there had been any major job losses as a result of privatisation. He also asked if the shortfall in terms of the pension fund had been remedied.
 
Mr Breed answered that there were no major job losses as a result of privatisation. The shortfall in the pension fund had been remedied.
 
Mr C Gololo (ANC) asked what Safcol's risk management plan was in terms of veld fires.

Mr Breed answered that, as this was a complex issue, the approach Safcol took was a scientific one. It looked at high-risk areas, had fire-fighting plans in place, and looked at other issues such as weather predictions.
 
Dr S Pillay (ANC) asked whether there was integration in terms of rural development. He questioned what the rationale was behind having so many entities, especially considering possible privatization. He also asked how Safcol saw itself in terms of assisting in the growth of business and the revitalisation of the South African economy.
 
Mr Chetty replied that Safcol had set up the enterprise development section which focused on, firstly, the development of forestry contractors and, secondly, working on the social compacts it had signed with communities.

Mr Breed added that Safcol's objective regarding the entities was to use them as enterprise development special purpose vehicles. If they were not going to be used as such, Safcol would deregister them. The Department of Public Enterprises was currently leading a project which sought to look into where Safcol would be as it moved into the future. It was, however, not looking at aggressive growth due to the pending privatisation.

The Chairperson asked when the decision to privatise had been made.
 
Mr Breed answered that it had been made in 1997/98 and reconfirmed in 2007.
 
Ms Moloi added that there had been a delay in the privatisation process in order to first deal with the land claims.
 
Mr P Van Dalen (DA) asked whether South African forests were being expanded in an effort to offset environmental damage.
 
Mr Breed answered that expansion possibilities were constrained largely by water licensing.
 
Ms F Hajaig (ANC) asked how many trees were planted annually.
 
Mr Breed answered that in a 'normal' year Safcol planted 5 million trees. Last year, however, due to the prevalence of veld fires, 10 million trees were planted.

Dr Oriani-Ambrosini asked whether there was any validity to concerns raised about Safcol's pricing being a result of its perceived monopolistic position.

Mr Breed answered that Safcol's market share stood at only 10% locally. Pricing was not something Safcol manipulated.

Denel Quarterly Report Presentation
Mr Talib Sadik, Group Chief Executive Officer, Denel, said that local revenue within the group stood at 64%.With its associates, its foreign revenue stood at 54%. This spoke to the success of its outward focus, which sought to create more foreign revenue. Although its total staff complement stood at 7 430, Denel, in view of the multiplying effect it had on job-creation (six per employee), was responsible for the creation of 30 000 jobs. Denel was made up of 11 business entities. Prior to 2006, Denel had shown increased year-on-year losses. This situation changed as a result of recapitalisation, which enabled it to attain a positive solvency position. Another reason for the challenges Denel faced was the decline in local defence spend.  There were five pillars of its macro-turnaround strategy. These were secure access to local defence spend, the intention to partner with strategic state agencies, a focus on growing the commercially viable businesses where Denel enjoyed real technological leadership, establishing secure equity business partnerships, and raising capabilities and productivity to world-class levels. Denel had also been de-centralised from a conglomerate to 11 stand-alone entities. The recapitalisation it had received was used to settle debt as well as fund capital projects and working capital and operating losses. Non-core businesses were also disposed of. Denel had concluded equity partnerships with Carl Zeiss Optronics, Rheinmetall Defence and Saab AB. Denel had, through these partnerships, achieved its objectives in terms of market access, industrial know-how and access to capital. The Denel-Saab Aerostructures transaction saw Denel carrying a major risk around the Airbus A 400 M. This risk was minimised by relying on the technical capabilities of partners who enjoyed gold status with Airbus and Boeing. It had, since completing its R400 million industrialisation programme, become a significant player in composite manufacturing. Denel had, since 2007, made significant changes in its governance, having addressed all of the issues that had caused it to be reported to the Independent Regulatory Board of Auditors. In terms of its business development, a noteworthy point was its increase in order cover from R3.749 billion in 2006 to R17.765 billion in 2009.  

Denel had also employed a Technical Executive who oversaw technical performance across the group. It had completed two Organisational Climate Surveys, which showed an improvement in its organisational culture index to 50% - up from 43% - as well as established Transformation Committees across all its entities. There had also been a significant reduction in turnover of technical and core skills (down from 35% to 17%). Denel had also seen an improvement in its financial performance since 2007. In terms of cash flow, it had utilised R800 million in its operations. Some of its achievement strategies for 2009 included its 'end-state' implementation plan, as well as its search for opportunities to broaden its shareholder base. Its missile review revealed that despite incurring losses, this business operated at world-class standards. Denel had been involved in Research and Development projects totalling over R1.2 billion. This made up over 20% of its revenue. Its challenge was to increase its revenue in order for this amount to stand at 10% of its revenue, since while it was at 20% the bias was still towards development and not industrialising. Denel's drivers included increasing access to sustainable markets, operational excellence, deepening its relationship with the Department of Defence, and strengthening governance and financial management.

Discussion
Dr G Koornhof (ANC) asked whether Denel should not be following the route it followed with its strategic equity partners, given how successful these partnerships had been. He questioned whether it was capable of continuing as a going concern, and whether it was possible for Denel to become profitable by 2012. He further asked if the Research and Development (R&D) of R1.2 billion was for one project only, or for numerous projects.

Mr Sadik answered that this depended on the classification of capabilities. Continuing as a going concern was of concern to Denel. Its emphasis was on strengthening its balance sheets. Becoming profitable by 2012 depended largely on the success of its turnaround strategy. The R1.2 billion was for all projects within the Denel group.
 
Mr Gololo asked how the legal contracts were contributing to loss of revenue within Denel.
 
Mr Sadik answered that Denel had decentralised the finalisation of legal contracts to each entity. It had also set up processes at a group level to ensure that risks involved in legal contracts were identified and managed. As well as having governance mechanisms in place at group and entity levels, its internal auditors were also asked to do a comprehensive review of programme management.
 
Mr Van Wyk asked what the consequence of Denel no longer existing would be for South Africa.
 
Mr Sadik answered that Denel was a defence capability and as such played an integral role in the defence of South Africa.
 
Mr Pillay asked what Denel's turnaround strategy was. 

Mr Sadik responded that although Denel had seen good growth as a result of its turnaround plan, it would still aim to achieve a better position.
 
Mr Van Dalen asked how protected Denel was against possible sabotage and espionage.
 
Mr Sadik answered that Denel made every effort to improve levels of security. There had been no loss of any sensitive products.

Ms F Hajaig (ANC) asked what the group's recruitment policy was, especially in relation to women. She also asked if there was any nexus between Denel and the National Conventional Arms Control Committee.

Mr Sadik answered that every product that it sold had to carry the approval of the NCACC.

Ms Patience Mashungwa, Group Executive: HR & Transformation, added that Denel had formed strategic partnerships with organisations such as Women in Engineering (set up by female engineering students). It had also revamped its Employee Value Proposition, which had led to more students viewing Denel as a potential employer.

The Chairperson asked whether Denel had considered maintenance of passenger and cargo aircraft.

Mr Sadik answered that it had engaged with South African Airways around this, but he could not say with certainty what the results of these talks were. Denel could provide the Committee with this information in writing, if required.

The meeting was adjourned.