Independent Communications Authority & Sentech 2006/07 Annual Report
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Communications and Digital Technologies
07 November 2007
Meeting Summary
A summary of this committee meeting is not yet available.
Meeting report
COMMUNICATIONS PORTFOLIO COMMITTEE7 November 2007
INDEPENDENT COMMUNICATIONS AUTHORITY & SENTECH 2006/07 ANNUAL REPORT BRIEFINGS
Chairperson: Mr I Vadi (ANC)
Documents handed out:
Sentech Annual Report
Sentech Presentation
Independent Communications Authority (ICASA) Presentation
ICASA Annual Report [available at www.icasa.org.za]
Audio recording of meeting
SUMMARY
The Committee was briefed by Independent Communications Authority of South Africa and Sentech on their Annual Reports. Each highlighted the current and past projects, the financial statements, their challenges and needs. ICASA noted that the strategic objectives included the promotion of affordable services and universal access, and noted that its major roles lay in the areas of market competition, spectrum management, and licensing. Achievements in terms of licences issued were highlighted. Challenges included licensing of the regional television services and community radio stations, under-serviced area licenses, infrastructure in the rural areas and the hiring and retention of staff which was delaying some projects. Members raised questions on the licensing of Infraco, the Radio Pretoria matter, e-rate, readiness for the 2010 World Cup, the portion of the budget spent on legal matters, the high rental being paid for the premises in Sandton, the progress on investigating the viability of the Under Serviced Area licences, whether this was likely to be a sustainable and workable area, the staff vacancies, risks around digital migration, and the competition and bringing down the costs of telecommunications. Further questions related to the standard licence fees for television licences, notwithstanding the lack of coverage in some areas, service obligations and standard licence conditions, and Cell C issues.
Sentech noted that its balance sheet still showed a loss, although this had been considerably reduced from the previous year. The role in bridging the digital divide was summarised, with a number of projects being listed and explained. Challenges included funding for broadband wireless, and the time taken to roll out such funding. There was a need to ensure that roll out through post offices had real impact in the rural areas. A further challenge related to the classification of Sentech under Schedule 3B of the Public Finance Management Act, and Sentech was seeking reclassification as a Schedule 2 entity. There was a need to accelerate frequency assignment for switch over to digital terrestrial television. Further challenges included skills retention, delays in licensing leading to loss of staff and allocation of funding for upgrading infrastructure. Questions were asked on MyWireless, the demographic staff figures, the attitude of the Department of Communications to reclassification of Sentech, Sentech's ability to deal with issues, the likelihood of its being able to access outside funding, and the position with Infraco.
Members agreed that separate sessions needed to be arranged to discuss 2010 readiness with ICASA, and to discuss the challenges facing Sentech.
MINUTES
Independent Communications Authority of South Africa (ICASA) Annual Report briefing
Mr Paris Mashile, Chairperson, ICASA, introduced the strategic intention and value drivers of ICASA. In the last year it had tried to increase the availability and quality of electronic communications services, encourage and maintain pro-competitive markets through effective competition and develop regulatory policies to promote competition, innovation and investment in services and facilities.
The Chairperson noted that ICASA was bound by the Act, and before anything came from ICASA it would be ratified and approved by the Council. The two main portfolios were concerned with markets and competition and licensing. Underserviced Area Licenses (USALs) had been an important commitment, to encourage all to extend services. There were laudable intentions but many challenges. ICASA had managed to issue 81 Value Added Network Service (VANS) operators and 3 Under Service Area licences, with a further six more subject to provision of additional information. It had renewed the XkFM licence. 702 Talk radio and Midi TV licences had been renewed. This was an attempt to licence the secondary market areas. Eleven community sound broadcast licences had been issued, including some short term licences geared to specific events.
A Member interjected to ask if this was up to date information.
Mr Mashile noted that this was a summary as to what had happened in the previous year, but he was happy to provide further figures if needed.
Mr Mashile noted that in the field of markets and competition there were 266 numbering applications. ICASA had published an updated central numbering database Mobile number mobility had been introduced; the impact could not yet be assessed but customers were given greater choice. With the coming on board of Neotel there was the necessity to have number portability within local exchange areas. The new systems were designed to ensure sufficient numbers for each area code, through using the ten digit numbers.
The Communication Manual was designed to assess the costs and prices of products. The price cap review had commenced as required by the ICASA Act. ICASA had also looked at graduated licence periods less than the current two years for mobile operators. The draft Interconnection and Facilities Leasing regulations had been released. A market intelligence study was geared to finding out who were the players, whether they were impeding the market, and to investigate cost-based pricing. The Post Office was now under the jurisdiction of ICASA and they were therefore responsible for tariff issues. The tariff had increased by 4.1%, which was below the consumer price index and within international ranges. ICASA had also conducted a ten-year review of broadcasting regulation. A code of good practice had been published for those with disabilities. It had also published a community sound broadcasting policy position paper and had participated in the digital migration strategy. He noted that some of the matters had taken some time due to the necessity to consult extensively.
Mr Mashile then moved to the area of spectrum management. He detailed the numbers of licences issued (see attached presentation). He noted that this was a limited resource. It was hoped that the digital migration would release further frequencies, through multiplexing. A large number of the population had cellphones and it was necessary to look at e-government services through cellphone information. The question of the 800 MhZ band was dealt with. ICASA had been concerned with compliance issues and had confiscated a number of illegal radio transceivers. 200 high sites had been inspected.
The objects of the Act included obligations to give access at affordable prices, particularly to public schools and rural areas. This was monitored on a monthly basis.
Mr Karabo Motlana, CEO, ICASA, stated that public awareness campaigns had been conducted in a number of areas, including the e-rate. He noted the number of complaints received and finalised, in the consumer and broadcasting areas. There had been adjudication of 3 hearings and the issuing of 60 monitoring reports. In addition the work in monitoring postal outlets was summarised. He noted that ICASA operated in a litigious environment as its decisions were often taken on review. It was involved in 15 litigation matters.
Icasa's involvement in international matters was summarised, including the bilateral meetings held with other regulators.
Mr Motlana advised of stakeholder management incentives. The postal regulator staff were integrated on 1 January 2007 and ICASA had implemented a performance review process and a job grading. He outlined the staff statistics and demographics.
Mr Motlana tabled the financial statements, noting that with the roll over there was now a surplus of R24 million. The statement of assets and liabilities was tabled. ICASA had received an unqualified audit report The collection and transfer of fees occurred on a continuous basis.
Discussion
Mr R Pieterse (ANC) raised a question on the licence of Infraco, and noted that this was a challenge. He asked if there would be space also for other operators.
Mr Pieterse asked about the Radio Pretoria court case, and noted that it was necessary to resolve the issue soon.
Councillor van Rooyen noted that this case came from the media, and on crucial aspects the Supreme Court of Appeal had ruled in favour of Radio Pretoria. This was an important judgment as it gave various guidelines in relation to community radio, how the Council must be constituted, who should be part of the working force and so forth. In the meantime Radio Pretoria was broadcasting. The matter was referred back to ICASA, who then discussed and decided against taking the matter to the Constitutional Court. The matter would be receiving urgent attention within the next two to three months. ICASA would have to change its view on some aspects, and re-consider the target area on the community interest nature.
Mr S Nxumalo (ANC) asked for clarity on the licences that had been finalised.
Mr Nxumalo asked ICASA about the e-rate
Mr Mashile said that e-rate included access to internet at 50% of the normal operating price, which was a universal service obligation. There was provision for 20 000 access points. There were project managers monitoring month to month progress. The roll out in Kwazulu Natal had been approved, with a certain number of posts going to each of the operators. The same would apply in Limpopo. He detailed some of the figures, and said that there was an attempt to meet the objects of the Act, and try to ensure services by meeting the operators half-way. The operators would see this as a social contribution. There was commitment, but the delivery was being monitored.
Mr Nxumalo asked about readiness for the 2010 World Cup.
Mr Mashile noted that a Committee had been set up and was dedicated to ensuring readiness, in providing the necessary framework. Temporary access must be available for a number of visitors.
Another Councillor added that ICASA had acted through its Committee, and was guided also by government guarantees to FIFA and the Local Organising Committee (LOC). There was a structure to take care of the ICT part of the tournament. So far ICASA was waiting on some directives to implement policy. The time line was being monitored; the only institution that might be affected was Sentech. There were some questions of logistics. Outstanding funds would be delivered to the project.
The Chairperson asked what legal obligations there were, including any licensing obligations. He noted that in the new year he would like to hear a full briefing on the state of readiness for 2010, with all stakeholders present. He wondered if there was the right kind of coordination and sense of urgency.
A Councillor responded that ICASA was guided by the commitment made by government, but also had to appreciate that this event, great as the opportunity was, would come and go. There must therefore be alignment also with the normal ICASA obligations, and he was confident that ICASA would not be falling off its normal course. There was already provision in the Act for ICASA to issue event licences, and there was urgency attached to them. As a matter of practice the LOC would submit its licence requirements in terms of services and networks, and ICASA had enough to benchmark against. The guarantees would be the guiding line. In answer to a question from the Chairperson, he noted that ICASA, through interface between its Committee and LOC, did not have a specific time frame, but had agreed that the sooner the licences could be issued, the better.
With reference to page 39 of the Annual Report, Mr Nxumalo asked what percentage of the budget was spent on legal matters.
Mr van Rooyen responded that in the last year the figure had been 2.6%. These amounts seemed high, but Senior Counsel had acted as Chair and Prosecutor. In the case involving the former CEO it was true that only certain days were used and that there had been some delays, but ICASA had scrutinised the matter and the bills and felt that there were not grounds to take the matter through to the Bar Council. This was a public interest matter. Generally, there was a policy of limiting litigation as far as possible. Some other matters had been settled rather than litigated. ICASA was trying to do as much in-house work as possible, but it had to brief Counsel for Court actions. A lot had been learned from the prosecution last year.
Mr Nxumalo asked, in regard to the high rental being paid, who owned the properties, and whether the buildings were owned by black economic empowerment (BEE) owners.
Mr Motlana noted that ICASA was investigating what it rented. It would be desirable to own a building somewhere that was accessible to consumers. The contract terms were set several years ago, and it was a ten year period, due to expire in 2009. There were discussions with National Treasury as to what could be expended on rental and the process was The building in Sandton was owned by a private company, and ICASA did not know whether there was any BEE shareholding in that company.
The Chairperson noted that ICASA should be getting its own premises. The amount being paid per year was exorbitant. The Head Office should be based in own premises.
Mr Motlana said that ICASA would act according to the advice received from National Treasury.
A Member noted that Department of Public Works had just issued some good guidelines.
Mr P Swart (DA) congratulated ICASA for its unqualified report. He hoped that never again would there be an unsuccessful disciplinary hearing and commented that this had been an unfortunate situation in which a great deal had been expended.
Mr Swart noted that in March the Committee had been looking at the viability of USALs. He asked what progress there had been.
Mr Mashile noted that the process had been investigated. There were challenges in the areas, and some licensees were facing competition with the established companies. To the extent that there had been a policy perspective, ICASA had done what it was required to do. The outcome was to licence USALs, and apply due diligence on sustainability. Some licences had been granted subject to the provision of further information.
Ms Marcia Socikwa, Councillor, ICASA, noted that the remaining USALs had to receive the licence conditions in terms of the Electronic Communications Act (ECA). Some licensees would have to wait until ICASA had finalised the standard terms and conditions, and would only receive their licences at the end of November.
Another Councillor added that there was a new dispensation; there were no more USALs. They would have to be looked at as class, network or individual licences. Most provincial USALs could become a provincial entity. However, at the moment, they were classes of network. They would become individual service licensees but class networks. This was similar to the situation with VANs.
Mr E Kholwane (ANC) asked whether ICASA believed that this was sustainable and workable in future.
Mr Mashile responded that there were challenges. Competition was heavy, and nobody was likely to let up when the bottom line was affected. ICASA believed that the challenges were the inadequacy of resources, and the difficulties of marginalised people forming and running companies. All community members were entitled to make demands. There were still individuals who felt that they could stand up to the "giants". ICASA could not be referees, players and judges. Its function was to provide the framework around which they must operate. The Universal Service Agency (USASA) must provide the services for technical, administrative and management issues. Both capital and operational expenses would need to be taken into account. He thought that perhaps for some licensees it would be preferable to consider leases, or to become a service provider, and not a network owner. The dynamics would change.
Mr Swart was concerned about the number of vacancies. The performance for the year indicated that outputs were not necessary in line with the plans, and some matters had been shelved because of "inadequate resources", certain matters had not been finalised, and some frameworks existed where the desired outputs had not been achieved, but matters were still in draft. He wondered if there were other impediments, or whether this was to do with inadequate resources.
Mr Mashile noted that vacancies had been a problem. ICASA was unique in having an executive council and management, and there were a number of tensions. It had been alleged that Councillors were interfering with day to day matters of the administrative staff. Some of the matters had been identified and dealt with, and the Councillors had positioned themselves to ensure coordination. Councillors were responsible for projects, and would be allocated team members. In regard to the day to day running, no Councillor could give instructions to any staff member. The traditional structures would remain, but individuals would be deployed to specific projects, rather than being directed by the Councillors. There should ideally have been a non-executive council, with the organisation being run by the CEO. However, a different structure was in existence and therefore the Councillors had to work within this. The new CEO had brought some fresh perspectives, and he had provided important advice on regulatory issues. A number of key positions had been filled.
Mr Motlana noted that the vacancy rate had dropped from 11% to 5%. Another issue being looked at was salaries, as the salaries of senior management staff were under the market rate. Conditions of service and delineation of roles were being investigated.
Mr Swart noted that the Annual Report, on page 62, indicated a risk around digital migration, noting that this might impact upon 2010. This was of particular concern. He asked what was happening with the report, and whether it had been received back from the Minister.
Mr Mashile noted that the "risk" was put in the context of saying that any remedy might have contra-indications. The risks would be addressed by the resources. This risk related at the end to funding. When assessing matters, the impact was measured, and the risks assessed from that.
Ms D Smuts (DA) noted that the House had just dealt with an amendment to the Electronic Communications Act (ECA) and the Minister would be issuing policy directives for public entities. She asked about VANs, noting that 81 had been licensed in the financial year. However, there was mention of increasing competition by conversion of VANs licences. She asked for further clarity on this. ICASA was supposed to ensure that there was increased competition.
Mr Mashile said that Infraco had been addressed, but there was a need to address outcomes and choices in terms of quality and price. ICASA had not previously managed to bring the price of communications down, but the coming on board of Infraco would address the costs, by retailers tapping into Infraco and letting the market forces dictate. ICASA had to ensure that cheap access by service providers would be translated down to the consumers. Infraco would not only address the service of broadband, but multi media services could be provided. Every country should have basic services in place, and he would include access to communications as amongst those services, at a good price. Government was not in the business of competition, but should ensure that those in need must be assisted. The Square Kilometre Array project and the developments leading up to the 2010 World Cup would be further developments that would assist. Although there was much hype about frequencies and mobility, there were difficulties, and wireless might not be the full answer.
Mr Pieterse asked what requirements ICASA had about broadcasting. He believed that it was not fair on the consumer to have to pay equal licence fees although some areas could not pick up certain signals. SABC had failed to come up with a suitable explanation.
Mr Mashile replied that the difficulties resulted from how much frequency was available without interfering with existing licensees. Many frequencies would be released with digital migration, some of the frequencies should be allocated to those not getting coverage at present.
Mr E Kholwane (ANC) noted that ICASA was to ensure access to communication services.
Mr Mashile said that there should be access but the question of affordability was also tied in with this. The objects of the Act should be realised in such a way that the marginalised were given options of having access to basic services. Mr Mashile noted that there was going to be a Memorandum of Understanding with USASA, and that it should not be dogmatic. There were obligations to address the marginalised, who would never be serviced if the market were to operate purely on market needs in a commercial way. Telecentres, postal services and so on, could be addressed between the two entities, with ICASA giving guidance and support.
Mr Kholwane asked about service obligations, and asked if there was synergy or a uniform approach around the matter of licence conditions.
Mr Mashile thought that there should be similarity in the general terms and conditions with what was currently in place. Any new players must be aware that in order to enter the market, they should be adequately resourced in terms of their technology and financing. He believed that the licence conditions and criteria must be put up front and anyone with the technical and financial resources should be able to enter the field.
The Chairperson noted that if the conditions were to be the same, this would preclude the small players from ever entering the market.
Mr Mashile said that all providers would be providing the same services, and that it would be impossible to drop the licence fees for new players while insisting that the traditional players should pay more. All players should accept that they were in the same market.
Mr Mashile noted, in answer to a question raised earlier, that Cell C issues were under review. ICASA had to be careful to try to avoid challenges, but it could not be perfect.
Mr van Rooyen noted that in February 2007, a 2003 decision in regard to Cell C roll-out was set aside. A task group had come up with a definition on roll out reports that it thought was reasonable, and had asked Cell C for a final report, which had not yet been received.
Sentech Annual Report briefing
Dr Sebiletso Mokone-Matabane, CEO, Sentech, noted that Sentech had reduced its financial losses to R21.5 million, compared to the previous year's loss of R76.4 million. The cash flow had also improved through the government grant, cost cutting and improved processes.
Sentech was playing a major role in bridging the digital divide. She summarised the projects for the Department of Home Affairs, the weather service, the mindset Health and Education project, which was internet based, the support for the perinatal HIV Research Unit, projects at schools, the Sci-Bono large science museum model, and a computer literacy and hardware training institute in Soweto.
The question was continuously asked about the impact of Sentech in reducing the cost of telecommunications. Sentech had launched MyWireless flexi products, and other players had since then come up with similar services, all of which were based on the low costs set by Sentech, which had thus been able to influence the trends.
Key challenges included funding for broadband wireless. It took a while to roll any funding out. Discussions had been held with the regulator, and the Departments of Communications and Finance. Discussions were ongoing with the post offices, particularly in the rural areas, to ensure that the roll out would have real impact. Further challenges existed in relation to the classification of Sentech under Schedule 3B of the Public Finance Management Act. It would make sense that it be offered more flexibility by being reclassified as a Schedule 2 entity. Conversion of licences in terms of the ECA would bring new challenges in terms of competition, and this was another reason why reclassification would be helpful in this highly competitive environment. The digital migration was mentioned earlier in relation to 2010. Cabinet had set a deadline of 1 November 2008 for switch on of digital terrestrial television (DTT) infrastructure. Sentech would have to acquire certain equipment, and would need frequency assignment. It was awaiting policy directives. It had hoped to have six months of piloting the network before switch-on, and was hoping that the policy makers and regulator would resolve the matter shortly.
Skills retention remained a challenge. New entrants such as Neotel were poaching staff, and other businesses that were expanding under the ECA were also looking for skilled staff, and offering higher salaries than Sentech could afford. The delays in licensing Sentech meant that many staff were leaving because of the uncertainty, but it was continuing to invest in training, through the school of technology and companies and suppliers internationally. It was continuing to engage with the Department of Communications.
Mr Mohammed Cassim, Chief Financial Officer, Sentech, presented the summarised income statement. Revenue against budget was down, because Sentech had come under pressure from lack of funding for roll out of the wireless network. Much traffic had also migrated off other networks. However, compared to the 2005/06 year there had been a volume increase. Operating costs had been managed well. The network was ageing, so cutting maintenance expenditure was not sustainable. There were loans with SA Broadcasting Corporation and Development Bank of South Africa (DBSA). The loss had decreased compared with the previous year. The adjusted figures, taking into account the international financial reporting standards depreciation figures, would in fact show that the operations of Sentech showed a profit. Cashflow was more positive. The DTT project was on line. There were high interest costs, due to the under-funding of the business. The business was in a competitive area and the margins must be kept low, in order to survive in the business environment. Sentech was using short term financing but had managed to improve debtor management.
Ms Beverley Ngwenya, Chief Operating Officer, Sentech, tabled the major capital projects. Digital Terrestrial Television (DTT) had a R95 million funding requirement for the year. There had been full spending and all work was completed in time and within budget. The roll out in the current and future years were set out. Broadband wireless funding requirements had been put forward, with a request for R3.125 billion, of which R500 million had been allocated. It should become cash flow positive by year 5. The 2010 requirements were estimated on the building of the communications centre and the links. A total of R196.5 million was requested for this project. Sentech had been allocated R21 million for participation in the submarine cable. It was participating in sector discussions in this regard.
Discussion
The Chairperson proposed that a half-day session be set aside to deal with the Sentech challenges in depth.
Dr Mokone-Matabane noted that she would welcome such a session to apprise members of challenges.
A Member asked a question on what was MyWireless.
Ms Ngwenya noted that MyWireless was a project to do with providing data at speed. The competitors were Telkom, Iburst and the 3G products. The brand was known as MyWireless. Insofar as performance was concerned, coverage was the main issue. Sentech had limited coverage, with about 56 sites, but this was not yet adequate for the market in which it was operating. This could be corrected with proper funding.
A Member asked for clarity on the demographic graphs.
Dr Mokone-Matabane said that Sentech was using the categories used by the Department of Labour, and noted that Sentech did not have staff in certain of the listed categories. It had a number of experts, who needed to be compensated adequately for their skills, although they would not rank at the management level, because this was not the area in which they had particular skills. In regard to the racial demographics of skills, there was still a majority of white males, as this was the group who had the most skills in the ICT area. The lack of adequate funding meant that there were not a number of exciting projects that would attract other staff, and even those young black graduates who were recruited would tend to leave very soon for better financial incentives. There were various attempts to retain staff.
Mr Kholwane asked what was the attitude of the Department of Communications in having Sentech reclassified as a Schedule 2 entity.
Dr Mokone-Matabane said that the Board had formally communicated to the Department the need to reclassify and she sensed that there was some support, but there had been consultations with National Treasury.
Mr Kholwane noted that the nature of the industry was such that players would either swim or sink amongst the "sharks" in the arena. If the financial challenges of Sentech could be addressed, he wondered if they would survive in the industry.
Dr Mokone-Matabane believed that with the necessary resources, Sentech would be able to address all the issues. About a year ago it had investigated the possibility of getting funding for broadband wireless issues, and there was an indication then from government that Sentech had the capability to succeed. She said that there were "sharks" in the business, but this was why there was a regulator. She believed that it was the task of the regulator to ease the way for the new entrants to the market, as otherwise the playing field could never be levelled if the same rules were to apply to old and new players. She believed that there was international precedent for having different systems, so that dominant incumbents should not feel they were being badly treated.
Adv Swart was impressed with the training of staff.
Adv Swart noted that Sentech was under obligations to perform, and the financial obligations must be linked to that. However, he noted that despite the claims that Sentech was making an operating profit, the balance sheet did not look healthy. The reclassification of Sentech's status had been under discussion for some time. If this was achieved, he asked if Sentech would be able to raise outside finance, particularly in view of its low profit margins.
Mr Cassim said that on the existing financial statements this would be difficult, because financial institutions would be unwilling to lend on the basis of the balance sheet. However, if each project was taken separately, the market would be comfortable to lend money, on a project finance basis. This type of lending would not allow for limitations on which market to access. The project would have to be rolled out to all parties and would have to take the social responsibilities into account. Each project could be a bankable project and grant access to the market. A further issue, however, was speed to market. If Sentech was slow to get approval, it would lose the market. Therefore the current situation showed an inhibition both from a timing ad funding perspective.
Dr Mokone-Matabane added that the issue of Infraco was important. It would be providing wholesale services, and Infraco would have highways of broadband. Either in the legislation or policy, Sentech would need to see what happened. Under the ECA, a network licensee was not limited to doing either wholesale or retail. Technically, Infraco could do it all. It would depend on the policy directive. The services would be complementary.
The meeting was adjourned.
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