Sentech Strategic Plan and Budget 2010-2013

Meeting report

Briefing by Sentech on Strategic Plan and Budget

Dr Sebiletso Mokone-Matabane, Chief Executive Officer, Sentech introduced the delegates and gave an outline of the briefing to the Committee (see attached document).

 

The presentation included a review of the achievements during 2009 and a summary of the corporate plans for the Medium Term Expenditure Framework (MTEF) period 2010/11 to 2012/13.  The strategic plan of the organisation included an overview of the mandate and an analysis of the market size and growth potential of the various products and services.  The impact of legislative and regulatory developments on Sentech’s business was assessed and mitigation strategies were developed.  The key risk factors determined were the Public Service Broadcasting Bill, the Digital Terrestrial Television (DTT) Final Spectrum Plan, the DTT Regulations and the Digital Migration Reasons Document issued by the Independent Communications Authority of South Africa (ICASA).

 

Ms Beverly Ngwenya, Chief Operations Officer, Sentech briefed the Committee on the business strategy of Sentech and the key performance areas (KPA’s) identified for the MTEF period.  She gave an overview of the project status of the DTT and 2010 FIFA Soccer World Cup projects.

 

Dr Mokone-Matabane explained Sentech’s human resources strategy and participation in Uhurunet.

 

Mr Mohammed Siddique Cassim, Chief Financial Officer, Sentech presented the assumptions used to determine the 2010/11 budget and the income statement, balance sheet, ratio analysis and cash flow statement for the fiscal periods 2009 to 2015.  The allocation to Sentech from the Department of Communications (DOC) for the 2010/11 fiscal year amounted to R160 million.  The income statement projection for the same year reflected a loss of R46.9 million after taxation.  Sentech’s balance sheet was considered to be weak and the organisation needed a major capital injection.  The weak balance sheet made it difficult to raise loans at preferential interest rates and Sentech planned to apply for Government guarantees of R100 million in two consecutive years.

 

Dr Mokone- Matabane concluded the presentation by stating that the broadcast signal distribution (BSD) business was profitable, DTT provided growth opportunities, the regulatory and policy risks were under discussion with the DOC and with ICASA, the capital structure of the organisation required strengthening and a new telecommunications business plan had been developed and agreed with the DOC.

 

Discussion

Mr S Kholwane (ANC) was not sure that the Committee was provided with sufficient information in order to accept Sentech’s budget.  He wanted to know how much funding was received from the DOC and how the funds were utilised.

 

The Chairperson explained the Committee’s obligation to conform to the requirements of the Money Bill.  The Committee had to approve the budget and needed to know the details of the strategic plan, the operational plans and the corresponding budget for each operational project.

 

Dr Mokone-Matabane explained that ICASA had issued the final Frequency Spectrum Plan (FSP) in November 2009 and the requirements in February 2010.  The ICASA FSP differed from the plan that had been followed by Sentech.  The FSP had substantial cost implications for Sentech and the matter was being discussed with the DOC.  As a result, Sentech’s budget figures were subject to change significantly.

 

Mr Kholwane pointed out that the Committee could not approve a budget that was expected to be changed.

 

Mr Cassim advised that Sentech had based its budget on certain assumptions, which were included in the briefing.  For example, the expenditure on DTT was estimated on the basis of the FSP submitted by Sentech.  When the FSP was issued by ICASA, the plan differed but it was necessary to continue with the implementation of DTT.  He advised that the only funding received from the DOC was the allocation of R160 million for the following three years for the DTT project.  Sentech was still in the process of determining the costs involved in the ICASA FSP.

 

The Chairperson reiterated that the Committee needed a detailed breakdown of the allocation received from the DOC and how Sentech planned to apply the funds.

 

Mr Cassim showed the Committee a detailed spreadsheet of income and expenditure items (a copy of which was not made available to the meeting).

 

Advocate J de Lange (ANC) again explained the Money Bill requirements that the Committee had to adhere to.  He requested a breakdown on how the R160 million received from the DOC would be applied by Sentech.

 

Ms Ngwenya replied that the R160 million would be utilised to achieve the KPA’s for 2010/11, as detailed in the presentation document.

 

Ms P De Lille (ID) asked how Sentech had determined the risks to the organisation.  She wondered at what point Sentech and ICASA had started to follow different paths to implement DDT.

 

Ms J Kilian (COPE) wanted to know what the budgeted amount was for each KPA.  She explained that the Committee needed the information in order to make an informed decision on whether or not sufficient resources were available to achieve the desired output.  She noted that the National Treasury published details on all the State-owned enterprises (SOE’s).  However, the figures presented by Sentech did not correlate to the information published by the National Treasury.  She was concerned that Sentech was relying on the possibility that Government guarantees will be provided.  She asked if Sentech was in a position to achieve the targets set and to carry out its mandate.

 

Dr Mokone-Matabane replied that the target date for the implementation of DDT set by the Cabinet was November 2008.  Sentech had to implement the project before the final FSP was issued by ICASA in order to meet the deadlines.  Sentech had made the assumption that the existing sites would be used.  The FSP that was eventually issued by ICASA required that other sites had to be used as well.  This issue had major financial implications for Sentech and the matter was currently being discussed with the DOC.

 

Mr Dingane Dube, Executive: Legal and Regulatory, Sentech explained that ICASA and Sentech had different roles.  ICASA was the regulatory and licensing authority and Sentech was responsible for the infrastructure necessary for radio and television broadcasts.

 

The Chairperson suggested that the discussion was restricted to financial matters.

 

Adv De Lange assumed that the R160 million in funding received from the DOC would be spent on projects to increase coverage from the current 33% to the planned 56% in 2011.  He asked if Sentech had a detailed breakdown of how the allocation would be spent.  Sentech had other projects in addition to the DTT project, which would require funding as well.

 

Mr Cassim confirmed that the only funding received from Government was the amount of R160 million.  The grant was ring-fenced and could only be spent on the DTT project.  The expenditure on DTT included capital costs and the cost of dual illumination (i.e. simultaneous analog and digital broadcasts).

 

Ms Ngwenya conceded that the documents included in the presentation were consolidated and did not include the detailed information available.

 

Mr Kholwane remarked that SOE’s were unaware of the legislative changes concerning the approval of budgets by the Parliamentary Portfolio Committees.  Sentech was a public entity and must account for all its income and expenditure, not merely the funding transferred from the DOC.  For example, the Committee needed to know how much was spent on staff costs.  He felt that the presentation did not provide a detailed breakdown of the revenue and expenditure items for the MTEF period required by the Committee.

 

Mr L Mkhize (ANC) wanted to know the cost of implementing the operational plans and what percentage of the costs incurred would be funded by public money.

 

The Chairperson asked if Sentech had the required information available and offered a short break from the proceedings to allow the representatives from Sentech to confer.

 

Mr Cassim advised that Sentech had forwarded detailed information to the Committee during the previous week.  He confirmed that a detailed breakdown of the operational expenditure and a breakdown of the budget items were available.

 

Adv De Lange was not sure if the representatives from Sentech understood exactly what information was required by the Committee.

 

Dr Mokone-Matabane accepted the Chairperson’s offer of a short break.

 

When the meeting resumed, the Chairperson explained that the Committee wanted to know (1) how the R160 million received from the DOC would be spent and (2) what the expected revenue and expenditure for the 2010/11 fiscal year would be.  He noted that the financial statements indicated a R47 million loss for the 2010/11 fiscal year.  The Committee could not approve a budget that reflected a loss.  Any request for additional funding from the National Treasury would have to be well-justified, else the expenditure needed to be cut to reflect a break-even situation.

 

Ms Ngwenya showed two new slides to the Committee (copies of which were not made available).  The first slide indicated the allocations for the 2010/11 and 2011/12 fiscal years, which had already been approved.  The amount of funding for the 2012/13 year was expected to be R166 million.  The second slide was a list of the DTT projects for 2010/11 and the corresponding budget amount for each project.  The entire R160 million allocation would be spent on the DTT projects and would not be utilised for any other projects or operational expenses.

 

Ms Kilian asked if Sentech’s budget for the current financial year (i.e. 2009/10) was approved by the Committee.  The timeframe between the submission of the budget, the approval of the Committee and the start of the fiscal year did not necessarily correlate.  The Division of Revenue Bill must be adhered to and any expenditure in addition to the approved budgetary amounts would be considered to be irregular in terms of the Public Finance and Management Act (PFMA).

 

Ms Ngwenya advised that the allocations for 2009/10, 2010/11 and 2011/12 had been approved and no additional funding had been made available.  The allocation for 2012/13 must still be approved.

 

Mr Kholwane suggested that the discussion focused on the proposed budget for 2010/11.

 

The Chairperson concurred as the budgets for future years would be discussed at a future date.

 

Ms Ngwenya read out the breakdown of the DTT programme and the amounts budgeted for each item.  The items listed were transmitters, PIE equipment, antenna systems, combiners, feeder and upling equipment, distribution systems, electrical and power supply equipment, heating, ventilation and air-conditioning equipment, satellite systems, civil engineering construction, upgraded testing equipment, knock-on costs resulting from frequency clashes, contract labour costs for work done on masts, sustenance and travel costs of Sentech project managers, project management costs and VAT.

 

Adv De Lange felt that the additional information provided was acceptable.  He asked what assurance could be provided that Sentech would achieve the target of expanding the percentage of coverage from 33% to 56% in a single year.

 

Ms Ngwenya advised that Sentech had been rolling out the necessary infrastructure for some time.  The equipment was in place and she was confident that the target would be reached.

 

Ms Kilian asked if the project management costs were ongoing or were only applicable for the duration of the project.

 

Ms Ngwenya confirmed that project management costs referred to the portion of the time spent on the project.

 

Mr Cassim explained that Sentech projected an operating loss of R8.8 million for 2010/11.  Net finance income of R34.8 million resulted in a profit of R26 million before taxation.  Sentech was a tax-paying entity. The taxation obligation for the year amounted to R73 million, resulting in a loss after taxation of R46.9 million.   It was important to note that there was no cash short-fall.  The most significant expenditure item was depreciation amounting to R132 million, which was not a cash item.  Sentech planned to raise a loan of R140 million, which it was hoped that the Government would back with a guarantee.

 

The Chairperson understood that Sentech would break even in the current financial year.

 

Mr Cassim confirmed that Sentech would break even in 2009/10.  A loss was expected in 2010/11 but the loss was not a cash short-fall.  He explained that the Receiver of Revenue did not allow the full amount of depreciation to be deducted, only an amount for wear and tear of approximately R75 million.  The deferred taxation in the balance sheet was in accordance with accounting rules but was not a cash flow item.

 

Adv De Lange requested further explanation of the anticipated Government guarantees referred to during the presentation.

 

Ms Kilian asked what the additional financial load was on Sentech with regard to the postponement of DTT.

 

Mr Cassim explained that the National Treasury had approved the funding required to provide dual illumination services.  There was no additional financial burden on Sentech.  He said that Sentech had share capital of R75 million and an asset base of R1 billion.  The organisation was therefore severely under-funded and needed to strengthen the capital structure of the company. A debt/equity ratio of 50% was appropriate in the market.  The low debt/equity ratio meant that Sentech was unable to borrow funds at preferential interest rates and the organisation needed an injection of capital.

 

Adv De Lange felt that it was necessary that the DOC, Sentech and the Committee engaged on the various issues in more depth at a later stage. It was necessary for all the parties concerned to agree that a cash injection in the form of Government guarantees was the best option available.  He suggested that the approval of the Sentech strategic plans and budget was put on hold and discussed more fully at a later date.

 

Mr Kholwane agreed with Adv De Lange’s proposal for further discussion but suggested that the Committee accepted the budget presented and engaged on the other issues before the end of May 2010.

 

Ms De Lille said that there were serious problems at Sentech that needed to be addressed.  She referred to the ministerial task team appointed by the Minister at a cost of R9.8 million and wanted to know if the recommendations made by the task team had been considered at all.  She agreed that the R160 million allocation from the DOC could be approved but felt that the rest of the plans and budget should not be accepted.

 

Mr Kholwane pointed out that the R160 million transferable to Sentech was part of the budget of the DOC.

 

The Chairperson advised that a new Sentech Board had been appointed, which would take office on 1 April 2010.  He suggested that the new Board engaged with the executive management as soon as possible and met with the Committee towards the end of April 2010 to discuss the vision and priorities for the organisation.  The Committee was clear on the Department’s budget vote and was in a position to approve the budget for the allocation received from the DOC.

 

Adv De Lange requested that Sentech provided the Committee with a detailed breakdown of each project and the funds that had been made available.

 

The Chairperson thanked the participants for their input at the meeting.

 

The meeting was adjourned.