Broadband Infraco Bill: Department responses to public submissions

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
28 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 to the Portfolio Committee on 22^nd August 2007
Broadband Infraco Bill [B26-2007]

Audio recording of meeting

SUMMARY
Members met with the legal drafters from the Department of Public Enterprises (DPE) together with representatives of the Department of Communications and Independent Communications Authority of South Africa , to hear the department responses to public submissions.

Various issues were discussed by the Department of Public Enterprises. The Department felt that exclusivity was in fact not in issue, as Infraco was not at liberty to deny anyone access and that they had to sell to everyone at a reasonable price. With regard to licencing it was proposed that a new insertion be placed within the Electronic Communications Act (ECA) which would allow the minister to issue a policy directive to the regulator to licence the entity without following the competitive process that was required by chapter 3 of the ECA. The issue of exclusivity would arise if Neotel refused to sell to anyone. Once Infraco was licensed it would have to sell directly to the public. After Infraco acquired its licence, Infraco would fall on its own and would have to become a wholesaler, and therefore Neotel would also buy from Infraco. Neotel could currently only operate in metropolitan areas, whereas Infraco was a national network. The two licences for each type of service would have to be obtained. The Department was proposing an amendment to the wording in terms of Infraco’s objects. The Department was suggesting a deemed provision for the Bill, and had been dealing with the Department of Communications. A proposed wording should be finalized by 30 August.

Members asked for further clarity on the licenses, the question of whether there should not simply be an exemption, guidelines for international companies wanting to compete, and the Infraco servitudes and expropriation powers. ICASA was apparently satisfied that as long as Infraco abided by the guidelines the position was correct. However, the Department would need to look further at other issues that may not have been covered by this Bill. The suggestion was made that Infraco might be receiving preferential treatment to other state owned enterprises, in terms of the right to roll out infrastructure. However, the Committee agreed that Infraco was set up as an entity with a very specific function and to fill a specific need. Telkom had no problem with the proposal. Neotel wished to defer comment. The Competition Commission would provide a written submission that would address the need for a competitive structure. Neotel pointed out that the competition would not be restricted to pricing issues. Neotel was asked to submit a written comment also by 3 September. The State Law Advisors commented why clause 6 had been drafted in this way. Sentech disagreed with some of the comments, and were also asked to provide written comment.

MINUTES
Broadband Infraco Bill: Department of Public Enterprises (DPE) response to public submissions
The Chairperson suggested that many of the issues in the Bill were straightforward, and that it was not necessary to debate every point at this stage. He then asked if there was still any disagreement with regard to the issue of exclusivity and whether there was disagreement with regards to the pricing.

Ms Portia Molefe, Director General: DPE, stated that there was in fact not a problem with exclusivity. Infraco was not at liberty to deny anyone access and that they had to sell to everyone at a reasonable price. The issue of exclusivity would only became an issue if Neotel refused to sell to anyone who approached them, or sold at a price that was unreasonable. In any event that Neotel refused to sell to the public then they would have recourse to the Independent Communications Authority of South Africa (ICASA).

Mr Paris Mashile, Chairperson: ICASA, added that even if Infraco was not licensed it was entitled to have some sort of licensing agreement. The pricing issue was to be determined by the market and one would need to look into the cost of providing the service before agreeing on what the price would be. It should also be noted that Infraco’s arrangement with Neotel was valid only if they were not licenced, and once Infraco became licenced they would have to open up for everyone.

The Chairperson asked for clarity on whether the issue of exclusivity arose only when Neotel refused to sell to any one, or when someone approached Infraco directly and Infraco refused to sell.

Mr Mashile stated that once Infraco became licenced they would become wholesalers and would have to sell directly to the public, including to Neotel.

Mr C Gololo (ANC) asked for clarity on what would happen to Neotel after Infraco acquired its licence.

Ms Molefe stated that Neotel would not have exclusive control over Infraco’s services and would have to buy services from Infraco just like all the other stakeholders. It should also be noted that Neotel would have to apply for two licences. Neotel’s first licence would relate only to the provision of network services by Neotel for metropolitan areas. There would have to be an infrastructure license for Infraco, because Infraco was a long distance network service provider.

The Chairperson asked for clarity into whether the Electronic Communication Network Services (ECNS) licence was the only one licence mentioned in the Bill for Infraco.

Ms Sandra Coetzee, DDG: Legal, DPE stated that the Department indicated that Infraco was deemed to be licenced, and was not specific as to the number of licences it should hold. The Bill merely mentioned the objects of Infraco and that it may require maybe one or two licences

The Chairperson stated that there may have been an indication in the submission which stated that the Department should have expressed specifically in the Bill the type of licences that Infraco might require.

Ms Coetzee responded that there were comments made as to the stated objects of Infraco. The Department was proposing an amendment to the wording in terms of Infraco’s objects. The Department was trying to secure the fact that Infraco was to provide broadband connectivity services through its long distance network infrastructure. For that purpose Infraco would need a network, and the services, licence.

The Chairperson asked why the Department did not clearly state the issue in the Bill.

Ms Coetzee responded that the matter had not yet been discussed fully, since the Department wanted to determine the objectives of Infraco first, and then put this into the ECA structure in terms of the licencing

Ms Molefe added that the Department was suggesting a deemed provision for the Bill. It should also be noted that the principle of Infraco as a wholesale services provider was well understood and the question arose of how to deal with this. Many people felt that both type of licences should be included in the Bill, whereas others felt Infraco should be restricted to network services licencing only, and not have a communication services licence. The Department had therefore been working on with the Department of Communications (DOC) in order to determine Infraco’s role as a wholesale network service provider, and how the licencing would be structured.

Dr M Van Dyk (DA) felt that it was not the function of the Committee to deal the endless debates on the licencing issue, as these issues never seemed to be resolved.

The Chairperson responded that it was the function of the Committee to deal with the matter. The Committee had constantly tried to ensure that the Executive would consult with the stake holders before they brought the Bill to Parliament. The Committee had agreed not to pass the Bill until all the issues had been understood, as the Committee was not willing to pass a Bill that could form the subject of a legal challenge.

Mr E Kholwane (ANC) stated that a balance needed to be made on the type of licence that was supposed to be awarded to Infraco.

Ms Coetzee reiterated that the Department was attempting to secure the fact that Infraco was trying to provide broadband connectivity services through its long distance network infrastructure. As far as including the type of licences in the Bill was concerned, the Department was working on a proposed amendment to the wording, which would detail Infraco’s objectives.

The Chairperson stated that the issue should be cleared up no later by Friday 30 August

Mr Wang asked for clarification with regards to the licensing scenario and what would prevent the Committee from stating that Infraco should have an exemption from licencing as it was performing a specific function.

Ms Coetzee replied that it was possible for the exemption. However the Department did not want to avoid licence terms and conditions, but wanted the security of licence.

Mr Mashile added that the exemption from licencing would occur if Infraco was to self provide the networking services. However since Infraco was selling their services to various stakeholders they needed to be licenced.

The Chairperson stated that the Committee did not feel ready to say anything conclusive insofar as the issue of licencing was concerned.

Dr Van Dyk asked whether other private international initiatives were to be allowed to compete in South Africa. He also asked for clarity on the financing of Infraco.

Ms Molefe replied that the issue of private international initiatives was a communications policy issue, and DOC and ICASA should provide further clarity.

Ms Mashila Matlala, Director Policy: Department of Communications (DOC), replied that there were guidelines in place, which international companies had to follow, with regard to the use of South African infrastructure.

Mr Dave Smith, Chairperson: Infraco, stated that R 627 million was used for the completion of the network and the establishment of Infraco. Part of the expenditure was also used to transfer assets from Telkom into Infraco. It should be noted that Infraco’s expenditure was managed by the corporate governance sector of the Infraco Board.

The Chairperson stated that according to various stakeholders it was not fair to extend Infraco’s servitudes.

Ms Coetzee replied that the rationale for the expropriation powers was that these were a strategic intervention. The Department, through the Infraco Bill, was trying to expropriate land which had not been defined for public purposes and there was no definition as yet as to what that land would constitute. It should be noted, with regard to the compensation, that it corresponded with the due processes of the expropriation and compensation board. The expropriation could only be carried out if Infraco was unable to secure access to land or servitudes in a normal commercial fashion.

Dr Van Dyk stated that he was very upset that the issue of financing was not given enough attention.

Mr Hendrikse stated that Dr Van Dyk should not be unfair to Infraco as the purpose of the hearing was not to hear about Infraco’s financing. This matter would be discussed when Infraco provided its annual report.

The Chairperson added that the matter would also be addressed during the budget hearings.

Mr Hendrikse stated that with regard to the expropriation he did not understand the concern of the various stakeholders who were objecting to the extension of Infraco’s servitudes.

Mr Karabo Motlana, Head of regulatory affairs, Cell C, stated that he did not see the basis for Infraco to provide commercial telecommunications without a licence. He asked for clarity on the purpose this would serve.

Mr Hendrikse stated that Infraco was not asking to operate without a licence.

The Chairperson stated that according to the Department’s argument Infraco should have rights and privileges that the private sector would not have, as it was a strategic intervention.

Ms Coetzee added that the Department’s argument was essentially based on the fact that the ECA referred to access to public services. This Act, however, did not define how one would access the services, and the Department was trying to close the gap. There would not in fact be a special dispensation.

The Chairperson asked ICASA to state whether everything that was proposed in the Bill was consistent with the ECA.

Mr Mashile stated that once the entity was licenced, then everything would be fine, and as long as Infraco abided by the ECA guidelines then ICASA would be satisfied. However, there would need to be an examination of the Bill to see what had not been covered and what still needed to be added.

Ms Matlala added that ECA covered the issues that had been raised in the Bill. The Department would have to look at the issues that had not been correctly covered in order to determine a way forward.

Mr Kholwane stated that he understood that the deeming clause had been dropped. Infraco technically did not have a licence with ICASA, and the question therefore arose how Infraco would go about their business without the particular licence. As he understood it, Infraco’s extended power would only be needed for the interim period.

The Chairperson stated that a consensus needed to be reached amongst the various stakeholders, who were asked to report back to the Committee by Tuesday 04 September.

Mr Phatang Nkhereanye, Senior Manager, Regulatory Affairs,Neotel stated that Neotel noted the concerns raised by members. This matter was raised in Neotel’s submission to the Committee. Infraco would be subcontracted to Neotel; hence it would enjoy the privileges of Neotel's licence rights. In the formulation of Infraco’s extended power, the Department would have to consider the constitutional implications. This would mean that Infraco would be receiving preferential treatment above other state owned enterprises (SOEs), in terms of the right to roll out infrastructure.

Ms Molefe stated that the point was very interesting and that one would have to show where the disadvantage lay. The Department had responsibility over Transnet and Eskom, which had strong expropriation powers, but were having difficulty when it came to the practicalities of expropriation. The intention behind extension of Infraco’s expropriation power was not to create any material disadvantage.

Mr Nkhereanye stated that other SOEs such as Transnet and Eskom did not have any competitors at all.

Ms Molefe stated that the final decision lay with the Committee, and if the Committee wanted to roll out broadband infrastructure fast, they needed to look at the provisions in a serious light.

Ms Coetzee emphasized that Infraco was set up as an entity with a specific function that was different to that of other state owned enterprises.

The Chairperson stated that the Committee generally agreed with Ms Molefe, and that the Committee was clear on the need for Infraco. The Committee also felt that Infraco should have certain rights and privileges, over and above other state owned enterprises and stakeholders in the market. It should be noted however that the issue could only be sorted out within a legally sound and constitutional framework. Clarity should also be provided on the issue of servitudes.

Ms Coetzee replied that the issue had already been agreed to commercially, both with Transnet and Eskom

The Chairperson asked DOC to comment on the progress with regard to licencing

Ms Matlala responded that Chapter 3 of the ECA set out rules for competitive procedures of an Entity. The Department was proposing a new insertion, which would allow the Minister to issue a policy directive to the regulator. This directive would facilitate the licensing of the entity without following the competitive process that was normally required by Chapter 3.

Mr Mashile added that this insertion would help with the strategic intervention part that would be included in the Act.

The Chairperson stated that he was struck by how simple the solution seemed to be, and wondered why the Department could not have thought of this solution before the matter was brought to parliament. It was unacceptable that the stakeholders were unable to confer with each other. The stakeholders therefore should state whether they were satisfied with the new proposal. .

Ms Mpumi Plaatjie, Specialist, Stakeholder Management, Telkom, stated that she had no problem with the proposal

Mr Nkhereanye stated that Neotel would defer its comment until the matter had been tabled for public comment.

Ms Molefe stated that intention of the investment was to gather in private sector investment, by ensuring that the basic infrastructure was available at a cheaper price. The Department had initially chosen the deemed licence position due to the fact that the deemed licence removed the risk of any legal challenge. If the Department had maintained its original position on licensing, then it would have had to undergo another legislative process, which would have delayed the licencing of Infraco.

Mr Kholwane stated that the communications process needed to be managed tightly so that the particular amendment could be finalised. It should be noted that the new proposal was better even though it was possibly subject to a legal challenge.

Mr Hendrikse stated that the Committee’s major concern was to get Infraco up and running as soon as possible.

Ms Molefe stated that the commercial agreement had not yet been signed by Neotel and until the agreement was signed the risk of legal challenge still existed.

Ms Coetzee felt that the marginal risk of challenge was taking over the whole debate

The Chairperson stated that, given the importance of the Bill, the stakeholders were reasonable content with the proposals. The Committee would meet at a later stage to discuss the various proposals in depth.

Ms Molefe said that the issues fundamentally dealt with market power and the Competition Commission should also comment on the issue of licencing.

A representative from the Competition Commission stated that the Commission would provide a written submission to the Committee with regard to the licensing. Their report would focus on the question whether South Africa would end up with a second competitive outcome, and the results that would arise from a duopoly. The Commission believed that it was much better to have a competitive structure, and that the Committee should pay attention to outcomes that would facilitate completion. Neotel may be an effective competitor, but may not have effectively competitive outcomes, in that their primary incentives would be to look after the interests of their shareholders. This would make the transparency of pricing between itself and Infraco very important. With regard to the roll out of infrastructure it should be noted that private entities would usually under-invest in unprofitable areas, which was the reason why the SOEs played an important role. With regard to licencing, the objective of the Competition Commission was not to undermine regulators. It commented that the State should not use the licencing under the Bill for its own advantage, but merely use it to focus on what the entity had set out to achieve.

Mr Ajay Pandey, Managing Director, Neotel, noted that the competition would not be on price alone. He also said that the notion that there would be no competition as a result of the establishment of Neotel was false.

The Chairperson asked Neotel to respond to the issues raised by the Competition Commission and forward them to the Committee no later than Monday 3 September

Mr Kholwane stated that he fully understood and agreed with some of the issues raised by the Competition Commission, and eagerly awaited for the submission by the Competition Commission.

The Chairperson asked the State Law Advisors to comment on the progress that had been made.

Mr Enver Daniels, Chief State Law Advisor, stated that major problem seemed to arise from the issue of the deeming provisions. The office of the State Law Advisor was confident that the deeming provision was constitutional. The drafters were also faced with a dilemma in which it had to be determined whether the issues that arose were licencing or economic issues. In order to address them, and to accommodate both ICASA and the ECA, his drafters came up with a two-phrased approach. In terms of clause 6.1 of the ECA, the licence should be deemed. However, although Infraco was deemed to have a licence there was nothing Infraco could do unless the provisions of clause 6.2 were satisfied.

The Chairperson stated that many people objected to clause 6.1 of the Bill, but Mr Daniels had explained clearly why this was done. The Committee would not pass the bill on 14 September unless all the issues around the ECA amendment were understood.

With regard to Sentech the Committee believed that all the issues were resolved and members should state whether they understood whether Sentech and Infraco had distinct and separate roles.

Mr Mashile stated that it was up to the shareholders to use whatever platform they wanted to provide any kind of service.

Ms Matlala added that in terms of the ECA the services that both Sentech and Infraco provided were similar; but the decision on the services was a shareholder decision.

Mr Dingane Dube, Executive Regulatory and Government Affairs, Sentech, stated that Sentech disagreed with some of the issues that the DPE presented in their presentation.

The Chairperson requested that Sentech should provide a written statement as to what it believed was incorrect to Members by no later than Monday 3 September.

The meeting was adjourned.