Minister of Communications & ICASA on Infraco licencing delay; Minister of Public Enterprises on Infraco & Transnet CEO appointment; Eskom Annual Report 2008/09 & Executive salary increase

Meeting report

Opening remarks
The Chairperson went through what was a full agenda. She already anticipated the need to recall the Eskom delegation at a later date. The Minister of Communications had been invited but was still at a Cabinet meeting. He would join the Committee later. The Committee had met the previous week to work out a long-term plan for their activities for the rest of the year and for the next five years. She had met with the Chief Executive Officer (CEO) of Eskom the previous day. She invited the members of the various delegations to introduce themselves. While she thanked the members of the Independent Communications Authority of South Africa (ICASA) for their presence she stressed that the Committee fully respected the independence of the body.

Dr S Pillay (ANC) confirmed that the Committee could not put any pressure on ICASA. The Broadband Infraco Act had been specifically promulgated to cater for the creation of Infraco. In order to fulfil its particular functions, Infraco needed both an Electronic Communications Service (ECS) licence and an Electronic Communications Network Services (ECNS) licence. A separate Act had been needed. Parliament could not deem the body to have these licences. The intention behind the creation of Infraco was to provide a service to the rural areas of South Africa. The Committee wanted to know why the granting of these licences was being delayed. Public hearings had been held when the Broadband Infraco Act was promulgated. All stakeholders had had the opportunity to make representations and these had been heard. After the Act had been passed, Infraco had to make an application for the licences. The same concerns had been expressed and these stakeholders had been given another hearing. He asked what the procedure was and why it was taking so long.

Mr S van Dyk (DA) asked how many meetings had been held between ICASA and Infraco and what would be on the agenda for future meetings.

Mr G Koornhof (ANC) said that it seemed there was no dispute over the awarding of an ECNS licence. However, there was a dispute over the ECS licence.

The Chairperson welcomed the Minister and his Deputy, who had arrived and invited him to address the Committee.

Infraco Licences: briefing by Minister of Communications
Gen Siphiwe Nyanda (Minister of Communications) reiterated government’s support for the independence of ICASA. Government could not interfere in their affairs, especially in the granting of licences. It had always been his understanding that Infraco would be a wholesale supplier of broadband connectivity. He had been invited to meet with the Department of Public Enterprises (DPE). Spectrum holding would not be allowed. There were no satisfactory answers at the meeting.

He said that he had then decided to re-issue the directive, but this time without the request for the ECS licence. There was no debate regarding the holding process. This led to questions over the role of Infraco. He was not sure why the ECS licence was needed. Another meeting had taken place where ICASA had made a presentation. It then became clear why the ECS licence was required. Infraco intended to provide services to huge customers such as ABSA Bank. This would see them operating in the retail space. This would affect their business case. The parties had then agreed on the need to obtain a legal opinion. While they were still talking about the issue, it had come under public glare. He did not want to see Infraco operating in the retail sphere.

Discussion
The Chairperson said that in terms of the Broadband Infraco Act, it had been expected that things would be happening by the end of September 2009. She thanked the Minister for his elaborate explanation.

Mr van Dyk said that he understood that a licence was necessary for Infraco to provide a service that was needed particularly in the rural areas. There was a huge need for this. The delay in the process was a barrier to success. What he had heard now was not synchronised with what he had heard earlier.

The Chairperson did not want to see the meeting becoming a confrontation between the Minister and ICASA. She would need to check on what had been said by Infraco at previous meetings.

Min Nyanda said that Infraco would be best suited to answer as to the reason for the delay. There was no harm in asking ICASA for their response.

The Chairperson said that Infraco would be recalled at a later date.

Mr Koornhof noted that Infraco needed two licences. He asked if the Broadband Infraco Act was synchronised with the Electronic Communications Act (ECA). He asked if there was any overlap between the Acts or if the Acts talked to one another. Three different legal opinions on the interpretation of the Acts had been offered.

The Chairperson said that the Committee needed to check on this situation.

Dr Pillay appreciated the briefing presented by the Minister. He hoped to see faster movement. Infraco would provide a service to the disadvantaged population and would lower the costs of broadband connectivity. He asked why the ECNS licence had not been approved. Infraco was already working with another company and relationships could be compromised as a result. There was a reason why the Broadband Infraco Act had been promulgated. It would have defeated the purpose of the Broadband Infraco Act if the ECA had been sufficient to establish Infraco. Billions of rand had been spent in bringing services to the rural areas. The current broadband licence holders were not interested in creating broadband infrastructure in these areas. Infraco had been established to provide this service. Conditions could be applied if there was concern that Infraco intended to enter the retail market. The delay was costing money while infrastructure created by Infraco was lying idle.

The Chairperson said that the understanding was that Infraco would take infrastructure to rural areas and would subsidise services. She asked if it would be possible for them to do this with only the one licence or if both were necessary.

Mr Paris Mashile (Chairperson: ICASA) said that he understood the need to reduce the cost of connectivity. However, he was not convinced of the need to grant Infraco an ECS licence. During their presentation to the Committee previously, Infraco had claimed that they needed the ECS licence to implement their mandate. ICASA had sought a combined legal debate with DPE and the Department of Communications (DoC). However, the two Departments had taken separate ways. Dr Pillay had referred to the way in which lawyers could all form their own opinions on the same issue. It was difficult to understand the reasons for the conflict.

The Chairperson said that the Committee had heard the Infraco presentation and had heard the Minister’s briefing. The Committee would review the two Acts. They still needed a briefing from ICASA. This would determine how satisfactory the progress was to date.

Min Nyanda pointed out that the Cabinet had come to a decision in 2007. They had approved the establishment of Infraco to act as a state-held broadband backbone and not as a service provider. This investment by government would lead to a reduced cost of communication and would provide structure to other service providers at a wholesale rate. He understood the need for Infraco to have an ECNS licence. The Broadband Infraco Act spoke to both licences. It was an incongruous situation. The right to issue licences lay solely in the domain of ICASA. This was probably the reason why the late Min Ivy Matsepe-Casaburri had issued the original directive.

He said that he did not want to get involved in the delay of the granting of the ECNS licence. His advice to ICASA was not to hold things up but to grant the ECNS licence. This would satisfy the role of Infraco. All parties had confirmed the need for this licence. It had never been the intention to place Infraco in the retail sector. The DoC had confirmed this position.

The Chairperson said that all parties seemed to be in agreement with the granting of the ECNS licence. However, ICASA had to reach an independent decision. The licence was essential for Infraco to get to work.

Minister of Public Enterprises comment on Infraco
Ms Barbara Hogan, Minister of Public Enterprises, said that she had not been party to the discussions. The priority was to provide broadband connectivity to the nation as cheaply as possible. They all needed to work together to solve the problems.

ICASA response about Infraco licensing
Mr Fungai Sibanda (CEO: ICASA) said that he chaired the ICASA committee that was responsible for licence applications. They were informed by the ECA in terms of timeframes and processes. Since the Minister had issued the directive on 6 February 2009 they had treated the matter as urgent. They had communicated regularly with Infraco and had kept them abreast of the process. A committee had been formed on receipt of the directive. On 13 March Infraco had been invited to apply for both licences. On 14 April the applications were submitted. In terms of the law, the application had to be published for public comment.

He said that some of the information provided by Infraco was confidential. Public hearings had been advertised on 6 May and the hearings had been held on 29 June 2009. There had been a process of negotiation on the terms and conditions of the award of the licences. It had not been easy and a considerable amount of give and take had ensued. There had been several meetings with Infraco, the last of which had been held on 31 July 2009. The initial plan had been for the process to be completed by early August 2009.

Discussion
Dr Pillay asked if the licence applications could be separated. He asked which process was associated with the different sections of the ECA.

The Chairperson understood that the process was for both licences from the start. She had taken it for granted that the process covered both applications.

Dr Pillay found it difficult to understand. The Broadband Infraco Act had been drafted in order to cater for the network licence required by Infraco. He understood how the granting of an ECS licence could lead to conflict with service providers in the sector but the ECNS licence would not result in any conflict.

The Chairperson allowed the ICASA delegation to finish their briefing.

ICASA response continued
Mr Sibanda said that both applications were considered. The process always involved both. During the public hearings the issue of the ECS licence application had become a central issue. ICASA had requested further information from Infraco on their ECS licence application. On 4 August 2009 Infraco had responded. It was clear to him that there had been no delay. A findings document would be prepared and submitted to the ICASA Council. A problem was that one of the ICASA members had been taken ill and had been unable to work for six weeks. They had been forced to draft the document afresh. The delay had been two weeks but he was not sure if there would be any impact. It was now September. They had submitted their findings to ICASA’s legal department. The ECS application was still under review and could not be discussed in this forum.

Discussion
The Chairperson said that the matter could then not be divulged in public.

Mr Sibanda said that the Council would still have to make the decision on the granting of the licences.

Dr Pillay still needed a clear answer. He asked if the ECNS application was still under review. The Committee had some homework. The delay was not necessarily only on one side. The ECA was in place. There was a special reason why the Broadband Infraco Act was promulgated as a separate Act. It should be there to simplify the process. This led him to the conclusion that the Broadband Infraco Act was unnecessary and was in fact a waste of time. He asked if there was any contest to the granting of the ECNS licence. If not then it should be granted.

Mr M Mangena (AZAPO) still misunderstood the licensing process. He asked if ICASA were of the point of view that the licences should be issued together.

Mr van Dyk pointed out that ICASA had said that there were no delays. However they were now revealing that there were some delays. Mr Sibanda had said that there had been negotiations and a give and take process. This did seem to be a delay. The process would have gone quicker if the parties had stuck to the provisions of the legislation, which was clear.

Mr M Nhanha (COPE) said that some role players had registered objections. The Committee had discussed the matter. If the objections had been entertained during the process of drafting the legislation then they could not be heard again in subsequent public hearings. He asked what kind of objections had been raised. He asked if ICASA thought it was a case of the “big boys in the market” objecting to a newcomer. He asked if the same questions were repeated. If so, then these parties were holding the process to ransom.

The Chairperson asked if ICASA would have known whether the same objections were being raised. Her prime concern was that Infraco did not have its ECNS licence and could therefore do no work. The Committee had a sense of urgency on the matter. It seemed there was no dispute with this licence application.

Mr Sibanda said that from the beginning, ICASA had always followed a single process encompassing both licence applications. He thought that this could be done but the process would not be completed the next day. Due process still had to be followed. If they failed to do this then they laid themselves open to challenges in court which could drag the process on for years. They had to work according to the legal requirements and had done all that was necessary.

He said that the ECA had been amended when the Broadband Infraco Act was promulgated. Even so, the ECA did not make provision for automatic approval of licence applications. The recommendation to the Council would be for the consideration of both licences. The Council would then have to make a decision.

Mr Sibanda did not think that the negotiation process was a delay. It was part of the process. Terms and conditions had to be agreed on. The process was similar to public hearings. The objectors had made it clear that there was not to be a debate on whether the licences were granted to Infraco or not. It was a question of law and the interpretation of the Act. The objections had come from the smaller operators. They feared that Infraco might act like any other state owned enterprise (SOE) and indulge in anti-competitive behaviour. There was a vertical integration structure to Infraco. That is why terms and conditions to the licence were needed. The ministerial policy directive, the two sets of legislation and the outcomes of the public hearings would inform the decision of ICASA.

Ms F Hajaig (ANC) asked what the timeframe of the Council process would be.

Ms D Ramodibe (ANC) was unconvinced about the combined procedure.

Mr Sibanda was hesitant to bind the Council on their decision-making process. He expected the decision to be made in late September or early October. The process was at its final stage unless there was some other intervention. The ECS licence application should be settled at Departmental level. The combined process made logical sense. If this was not followed, the process would have been twice as long. It was best to kill two birds with one stone. Only one entity was involved. Separate applications would only serve to delay the process further. He did not think there were any negative considerations to this approach.

The Chairperson said that the problem lay with Infraco making two applications. ICASA had to consider both applications simultaneously. She asked why two applications had to be made and whether the Act made allowance for this. She thanked ICASA for their input. She advised Mr Sibanda to work on his temperament. The Committee had some homework to do. They needed to study both Acts. The Sentech issue was of a similar vein. They would call on the DPE for their advice.

Eskom presentation on Annual Report 2008/09
Mr Bobby Godsell (Chairperson: Eskom Board) said that he first wanted to object to a misleading headline that had been published in the Cape Times. The subject was that of Eskom Executive remuneration. The Board had decided this in July 2008. Factors influencing the decision had been the performance of its members, the state of Eskom’s finances and the state of the national economy. Increases granted had been linked to inflation. The salary increase granted to the CEO, Mr Jacob Maroga, was only 9%. This was not the right time to decide on bonuses. They would be considered if the company was successful.

He denied that Mr Maroga had been given a 27% increase. Mr Maroga had been appointed as CEO in early 2007. He had been a member of Eskom before that. His salary was below CEO level and the Board had decided to increase it over a two-year period. The last adjustment had been in April 2008. He asked if a 9% increase was fair. He asked if the base salary of the CEO was appropriate. Eskom was the ninth largest company of its kind in the world and had a turnover of R100 billion annually.

Mr Godsell said that Eskom had been successful in keeping the lights on. They had set themselves three goals. The first was to rebuild coal stocks. The second was to conduct maintenance. The third was to improve the usage habits of consumers. They had enjoyed some success with the first two goals but less so with the third. They were still using vast amounts of coal but the stockpile had been increased. Additional open cycle gas turbine (OCGT) generators had been introduced which were powered by diesel. The number of staff had been increased by two thousand.

However, he said that considerable losses had been sustained in the 2008/09 financial year. The losses were of an unsustainable magnitude. This had forced Eskom to introduce cost-saving measures. They had planned savings of R22 billion compared to their R100 billion turnover. In order to maintain their mandate they would need to recover costs.

Mr Godsell said that there had been a significant increase in tariffs. He understood the negative consequences of increased tariffs. The cost to the consumer in South Africa was 3 US cents per kW/hour as compared to 8.9 US cents in the rest of the world.

He said that Eskom had accepted their duty to use resources effectively. They were busy with their largest infrastructure expansion. This programme would cost approximately R400 billion, of which R80 billion was still unfounded. The programme would suffer delays if the gap was not closed. They had to determine how much energy was needed. Coal-fired plants accounted for 95% of power generated. This had consequences for the environment in terms of emissions and water supplies. Other sources had to be considered.

Mr Jacob Maroga (CEO, Eskom) introduced his delegation. In response to an earlier quip from the Chairperson he said that the team was gender representative. One of the ladies present was in a senior position.

Highlights
He listed a number of highlights. The first was the reframing of the role of Eskom. A wise man had said that a crisis was a terrible thing to waste. Following the power crisis of 2008 there had been a deep discussion of the lessons learnt. Eskom realised that they had to change their mode of operation. There had been no load shedding since April 2008. The direct causes had been addressed. Coal stocks were now at an optimum level. Capacity had been increased. New peaking plants had been brought online. Some mothballed stations had been refurbished. The economic slow-down had helped as the demand had decreased. Maintenance was now possible. The shareholders had lent their support and had provided guarantees to the value of R177 billion. R60 billion had come in the form of an equity loan. Investor relations were good.

The next highlight was in terms of cash management. They found themselves in a tight borrowing environment. Cash was needed for expansion.

The CEO said that the people of Eskom were another highlight. Despite the challenges they had remained focussed on their tasks. This was despite the difficulties experienced over the last three years.

He said that Eskom needed to expand but was suffering from a low credit rating. They had needed to enter into deep conversations with credit rating agencies. These agencies came to see the critical role Eskom played in the economy. This had helped Eskom to persuade the agencies to hold on before issuing negative ratings.

Mr Maroga said that collaboration with stakeholders was good. This would put flesh onto the funding model. They would continue with the building programme. This would satisfy the country’s power requirements while also stimulating the construction industry.

He said that Eskom was paying for their recovery. They were paying with their bottom line. They had gone to the National Energy Regulator of South Africa (NERSA) during 2008, as their revenue was insufficient. They had been forced to plan for an operational loss in the current financial year. This could not be a long-term solution.

Finally, the CEO said that Eskom had the support of the Board. This enabled Eskom to maintain the business while addressing the needs of the country. The Board was focussed and met often.

Challenges
Mr Maroga listed a number of challenges. The first was that of the primary energy source which was coal. There were problems such as cost and transport. They had to look for new sources. These were underlying challenges. There was a strain on reserves that had an impact on reliability. This would still be a long-term problem.

He said the next challenge was the execution of the build programme. This was one of the largest projects in the world. Eskom needed to manage the programme in terms of quality and maintaining the schedule. Funding was a problem.

The CEO said that there was a challenge in commodity linked pricing. The country had enjoyed a situation of excess capacity for more than twenty years. Part of the solution was attracting high-usage customers. Aluminium smelters were such an example. Long-term contracts were offered. The contract price was linked to that of aluminium. Now there was no more excess capacity. Electricity costs had increased but the cost of aluminium had decreased which resulted in decreased revenue for Eskom. This accounting type of contract was driven by global standards. The life of the contracts was a challenge. The decrease in the aluminium price was having the biggest effect on income.

He said that financial sustainability was a challenge. Eskom wished to break even by the end of the year. A financial model was being developed. Business efficiency was essential.