Sentech on financial challenges & business relationship with SABC and community radio stations in terms of debt owed or due payments

Meeting report

Sentech presentation

Mr Tebogo Leshope, Chief Operating Officer (COO): Sentech, said Sentech had been requested by the Committee to provide a presentation on the signal distribution to the SABC and the community broadcasters (CBs), and he believed that this presentation was pitched at a sufficient level to address the questions asked about the tariff structure of the SABC and the CBs. The purpose of this presentation was to demonstrate the cost of signal distribution and demonstrate Sentech’s multi-platform for content delivery for the SABC and CB.

Services and platforms

Sentech provided its customers with different services, like the Digital Transmission Terrestrial (DTT), Direct to Home (DTH), analogue television (ATV) and radio, digital radio (DR) and Over the Top (OTT) and streaming. It provided universal platforms, and the customer could choose any platform based on their preferences.

SABC services’ national coverage and footprint

Mr Leshope presented a slide demonstrating the coverage and the scope of the SABC across the country. The national coverage of ATV was large and was present in each province. The entire coverage was across 792 distribution points. The national FM coverage of the SABC was also present in each of the nine provinces, and the coverage was across 769 distribution points. DTT coverage was also present in the nine provinces. Medium wave (MW) was not present in a lot of the provinces, because this type of technology would be stopped soon.

SABC tariff drivers

The national coverage explained why the SABC had to invest in content delivery, because it had a mandate to educate, inform and entertain the people of South Africa. It had the biggest electronic media asset base, with 19 radio stations and five TV channels, and it was important for the SABC to invest in content delivery because most South Africans still depended on it as a source of education, information and entertainment. Sentech ensured that the network coverage of the SABC was available 24 hours of the day for the whole year.

Sentech business model

Mr Leshope stressed that as Sentech was a Schedule 3B public entity, it had to be self-reliant and could not request any bailouts from Treasury. It was committed to effective governance and efficient management, and this was why it had had eight consecutive clean audits. It had honoured its service level agreements (SLAs) to customers with 99.8% network availability, by managing and maintaining the infrastructure, and always looked for ways to deliver the best services in a cost effective way to its customers.

Relationship management

Sentech had a good relationship with all its customers, and engaged with them on a regular basis. It had a meeting every month with the SABC to discuss all billing issues and operational matters, and every second week there was a meeting between the SABC and Sentech to address issues and try to build a stronger relationship.

It had presented the CBs’ new tariff model to the Media Development and Diversity Agency (MDDA) and their grantees to assist in the community radio sustainability (CRS), and was also participating in the MDDA outreach programme

SABC debt to Sentech

The total outstanding amount owed by the SABC to date was R340 million, and there was continuous engagement between the SABC and Sentech on restructuring and settling the debt. In the month of October, the SABC had paid R20 million towards settling the restructured debt, and R197 million of the restructured debt was still outstanding. The payment holiday debt of R218 million had been reviewed, to be settled in eight installments. The payment arrangements were due to start in July, but the SABC could not honour this agreement and had indicated that it would pay another R90 million in November, which would go towards October invoices and payment of the holiday debt.

Community broadcasters’ debt to Sentech

The total outstanding amount owed by the CBs to date was R81 million, and there was continuous engagement between Sentech and the CBs on settling this debt. The CBs owed Sentech R70 million for services delivered, and the MDDA had requested to buy out the invested CB assets, the terminal value of which was R11 million. The total payable for the debt and assets’ terminal value, if elected, was R81 million.

Signal distribution cost

Sentech charged the SABC R72.5 million a month for signal distribution. This had accumulated to R869.8 million for the year, and Sentech was concerned about the financial sustainability of the SABC, so it had offered a discount of 2% each financial year. A further 3.7% discount had been offered because of the cash flow issues of the SABC. The total discount provided to the SABC was 5.7% for this financial year.

Sentech had also granted the SABC a three-month payment holiday because of the Covid-19 pandemic. This payment holiday amount had accumulated to R215 million, and the SABC had failed to pay this amount. It had indicated it would catch up on any payment backlog by the end of the financial year. He wanted the Select Committee to note that Sentech was trying to reduce the costs of the SABC

Signal distribution cost contributors

Mr Leshope said the main contributors were direct service costs related to human capital, technology management, and energy and satellite capacity rental. The human capital costs contributed 37% to tariff costs, with satellite capacity cost contributing 27% and energy supply contributing 13%, which was a key aspect of service production. Sentech was actively looking for ways in which to reduce these contributions to costs.

DTT reduced cost benefit

By trying to reduce signal distribution costs, the SABC would reduce by 27% at the national Analogue Switch-Off (ASO), and in Sentech’s view, this 27% was very significant in cost reduction.

Tariff methodology

For the DTT network, Sentech had adopted a new tariff methodology that sought to balance the transmission costs and the sustainability of the organisation. It was basing its target revenue parameters on the return on investment (RoI), depreciation charges and the recovery of pass-through costs

Conclusion

Mr Leshope said the biggest costs involved in delivering signal distribution were satellite leasing and human resources (HR), which were important aspects for it to be successful. Sentech was aware that the SABC was considering a new strategy for digital television (DTV) in order to change tariff costs. Sentech was engaging with the SABC to find ways in which Sentech could assist the SABC in delivering on its mandate. The issue of Sentech tariffs had been raised by the SABC, and both companies were looking for a long term solution. Sentech would like to resolve all issues with the SABC in a private manner, and not in public. It was not requesting that the SABC pay the current bills because Sentech had to be financially sustainable, and was doing this by still providing a reliable network so that the SABC audiences continued to receive uninterrupted services.

Sentech remained committed to providing a multi-platform service to all its customers, which includes DTT, DTH, OTT (online streaming) in a cost effective way.

Dr Mashilo Boloka, Public Entities’ Oversight, Department of Communications and Digital Technologies (DCDT), told the Committee that the DCDT advised the SABC and Sentech on policy alignment, and said that both companies should work together on policies.

He raised the issue of the satellite cost driver contributing 27%, and said a lot of satellite owners were not South Africans, which meant there was a lot of money leaving the country. This was a concern, because there was no information security -- the information was in the hands of other countries. That was why the government had given Sentech the mandate to establish South Africa’s own satellites. Nigeria and Angola had done this, and he thought that South Africa, given its capacity, could do this too.

CBs were the biggest concern, because their debt was increasing and there was a need to assist Sentech with this issue. The Department had to look at sustainable methods of helping, not just giving the CBs bailouts, and the main focus should be on the CBs in rural areas which could not afford the Sentech fees

Discussion
Mr A Arnolds (EFF, Western Cape) said the presentation had been very clear on what needed to be done, and what the issues regarding the DTT matter were. His question was very important with regard to the SABC being financially self-reliant. He asked Sentech if their four subsidiaries were still dormant, and if they planned to use these companies as part of their expansion plans. When last did Sentech do a stakeholder survey regarding customer satisfaction and if they did, had there been any improvement in their service delivery? He expressed his concerns about the billions that Sentech would have to invest in their new satellite project.

Ms L Bebee (ANC, KZN) asked what percentage the SABC contributed to Sentech’s revenue, and if the digital platform would expand and diversify Sentech’s customer base.

Mr M Nhanha (DA, Eastern Cape) commended Sentech on their clean audits. He referred to the relationship between Sentech and the SABC, the fact that it had been giving the SABC discounts. He said the situation the SABC found itself in had been self-inflicted, and he was concerned about what effect the payment holiday and discounts granted by Sentech would have on its own revenue. He asked if it had granted discounts and payment holidays to other stakeholders and if not, why not, because all payers had been affected by the Covid-19 pandemic.

The second issue he raised was around the debt owed by the CBs. The MDDA could pay this debt, but the CBs would find themselves in debt again next year. They therefore had two options. The first was to constantly subsidise the CBs with money that the state currently did not have, and the second was to provide a cheaper and sustainable signal provision for the CBs. Had Sentech had come up with a sustainable plan for the CBs, because continuous bailouts was not an option.

He asked to what extent digital migration would affect the CBs, and if it did, what was the state of their readiness and was there a plan to prepare them when they had to move. He got the sense that Sentech was trying to bill the CBs out of existence, because the CBs could not afford its rates. He asked if the rates for the CBs, SABC, Multichoice and other independent companies were different, or if they were all charged the same rates.

Sentech’s response

Mr Leshope responded that Sentech’s the four subsidies were dormant.

They conducted customer service surveys on an annual basis, and had recorded a 73% customer satisfaction rating, which was an improvement from last year’s 69%.

He referred to the comment made on the investment in DTT, and said Sentech was looking for ways to utilise the investment made by the government.

He responded to the questions of Ms Bebee by saying that the SABC contributed 60% of Sentech’s revenue, and that DTT had the potential, if maximised, to expand and diversify their customer base from the television perspective, and they were looking internally to try and diversify it. They had the broadband initiative strategy and the international strategy which would broaden their customer base.

He said that by granting the SABC discounts and payment holidays, there would be short term effects on the finances of Sentech, and this was not what any organisation wanted because it held one back from making investments and growing the business. Sentech granted payment holidays to any customer who approached it for help because of the Covid-19 pandemic, and some had requested more than three months. However, they could allow for a payment holiday only of three months.

Sentech agreed that the CBs’ economic model was not sustainable because they continued to fund the CBs’ services. They had developed a long term sustainable strategy for the CBs, and wanted to explore a model where the CBs could take full initiative for establishment costs. This would lower the tariffs that the CBs had to pay. It was not Sentech’s intention to try and bill the CBs out of business, because it cared about the diversification of the BCs and media across the digital platforms. After an engagement with the CBs, Sentech had decided to give the CBs a discount of 20% on the tariff they pay. He added that the migration of DTT would affect the CBs, and in the initial model they anticipated coverage growth. In an engagement with the CBs, they had said that they would not be able to afford coverage growth, and it was decided that maybe Sentech should retain the initial coverage because of this.

Further discussion

The Chairperson asked at what stage the merger between Sentech and BroadBand Infraco (BBI) was, and what progress had been made. He also wanted the COO to expand on the issues regarding the debt owed by the SABC to Sentech, because there had been complaints by the SABC regarding this debt. He wanted to know what the interest rate of the debt was, and when exactly the debt had started. To iron out the issues, he wanted all the stakeholders involved to meet with the Select Committee.

Mr Nhanha said he was pleased that Sentech did not have the intention to bill the CBs out of existence, and thanked the COO for the additional information, as he did not know that Sentech had granted the CBs and other stake-holders discounts and payment holidays. He agreed with the Chairperson that there must be a meeting between the SABC, Sentech and the Select Committee. Although Sentech might not be at liberty to discuss their relationship with their customers -- and if this was the case, he would accept it -- he wanted to know which customers had asked for payment holidays and what the total of all these payment holidays was.

He referred to what Dr Boloka had said about satellite owners, and asked at what stage the Sentech mandate was for developing its own satellites, and could South Africa could afford it.

Mr Arnolds said the Select Committee needed to have a meeting with the SABC and Sentech, and he wanted the Minister to be present.

Sentech’s response

Mr Leshope said that the debt of the SABC had started two years ago and it had almost repaid this debt. However, the Covid-19 pandemic had then happened, and the debt had escalated since then.

He responded to Mr Nhanha’s questions by saying that he would like to respect the contracts Sentech had with its customers and not say who had requested payment holidays. He would only say that ten of their customers had requested payment holidays.

He said the Sentech mandate was for developing its own satellites was currently under way. They had a business case which looked at their potential customer base, and the new mandate did have cost reduction features. The mandate was important because they wanted South Africa to have technological sovereignty and rely on its own technology, rather than external providers. The cost of the new mandate to launch the new satellites would be roughly R5 billion, which was worth it, because this would reduce the cost of connectivity and the cost of media access, and the satellites would be in space for 20 years.

The Chairperson asked how long this project would take

Mr Leshope responded that the project would take about five to seven years, because it would take some time to get it running, but the idea was to produce it locally.

Dr Boloka wants to add his input to the earlier questions asked by Ms Bebee and Mr Nhanha.
Responding to the question of Ms Bebee, he said that the market would open more, not only for South Africans, but for International investors as well.  Regarding the issue raised by Mr Nhanha on the billing of CBs, he said that stations such as Jozi FM were very profitable, but stations situated in rural areas did not have the means to survive and needed government support.  The CBs were very important for delivering information in different languages, so the government should do everything they could to help them. The DCDT and Sentech would have to ensure that technologically the CBs did not fall behind as a result of digital migration.

The BBI and Sentech merger would happen in 2022 because of all the processes that needed to take place, and they had already completed the business cases. The DCDT had advised Sentech and the BBI to start working on projects together next year, and not to compete for projects. The DCDT was supporting Sentech on their new project, and the new mandate of launching the satellites would be cheap and would create jobs.

Further discussion

Mr Nhanha said Dr Boloka had misunderstood the point he was trying to make regarding the support given to the CBs. He did not want to be in the newspapers tomorrow, being quoted that the DA was against the government supporting the CBs. For the record, the DA did not have an issue with this. The point he was trying to make was that the government would always support CBs, but the issue was whether this would be a sustainable way of going forward, and he had wanted to know if Sentech had come up with an idea to support the CBs in a sustainable way.

He suggested that the Committee must be briefed by Sentech and the DCDT on the new project when the time was right and it was safe to do so. The lifespan of the satellite was 20 years, as the COO had said, and he was confident that they would receive their investment of R5 billion back in those years. Had Sentech thought about expanding their services to other countries?

Responses

Mr Leshope responded that Sentech had considered expanding their services to neighbouring countries, where they saw potential for 30% usage.

Dr Boloka apologised to Mr Nhanha for the misunderstanding, and said the CBs were very close to the hearts of the Committee. He requested everybody to play their part in ensuring that this sector was sustainable, whether it was through donations or Departmental intervention.

Regarding the issue of the satellites, the project might not be profitable if only South Africa was making use of it, which was why they should extend it to neighbouring countries. They needed to act fast, because once the international satellites had customers tied up in a contract, it would be difficult for them to reach their target markets

Mr Nhanha said he had not heard a response to the proposal of Sentech briefing the Select Committee on their new satellite project

The Chairperson replied that there was no need for a response, because the Committee would need them to discuss their project and discuss progress made, because it was very important.

Committee minutes

The Chairperson asked the Secretary to deal with the Committee’s internal logistics.

The Secretary took the Committee through the minutes of 16 September, and 7, 14 and 21 October 2020.

The minutes were considered and adopted without amendment.

The meeting was adjourned.