Joint meeting with SENTECH & Broadband Infraco on pending merger

Meeting report

Chairperson’s opening remarks

The Chairperson welcomed everyone present. He commented that the Minister had not attended the Committee’s meetings for some time, and requested that the Acting Director-General inform her that the Minister’s presence was crucial at Committee meetings. He said there had been a change in the meeting time, but it had been understood that the Minister would be part of the meeting.

Mr M Nhanha (DA, Eastern Cape), wanted to know if there was a delegation from SENTECH to represent the Chief Executive Officer (CEO), who had sent in an apology. He also expressed concern about the absence of the CEO at the meeting, and wanted to know if sufficient notice of the meeting had been given to the Department.

The Chairperson responded that according to the Acting DG, the Chief Operating Officer (COO) would be representing SENTECH at the meeting.

The Committee’s Secretary also responded that notices had been sent out towards the end of last year.

Presentation by Department of Communications and Digital Technologies

Ms Nonkqubela Jordan-Dyani, Acting Director-General, Department of Communications and Digital Technologies (DCDT), apologised for the absence of the SENTECH CEO. She explained that he had been scheduled to attend the meeting until the meeting time had been changed. The CEO had tried unsuccessfully to shift pre-scheduled interviews, but because of the sensitivity and urgency of the recruitment exercise, he could not attend the Committee meeting.

The Acting DG said that the matter for consideration was very crucial, and in the light of the COVID pandemic, the issue of connectivity was vital, regardless of where a person was domiciled. She said that in 2016, the information communication technology (ICT) policy White Paper had been adopted, and a presentation was made to the Select Committee. She recalled that there had been a proposal for the establishment of a new institutional framework, where all state-owned infrastructure in the country would be aggregated in order to provide wider connectivity. Work was ongoing, and the Minister had established a joint oversight board consisting of SENTECH and Broadband Infraco (BBI). Currently, the first phase of the merger was between these two entities, both of which had their respective mandates, and both were responding to the issue of digital infrastructure. Engagements were ongoing with the Department of Public Enterprises (DPE) on the aggregation of other ICT infrastructures that were basically under other departments.

Mr Rendani Musetha, Chief Director: BBI, DCDT, and Mr Tebogo Leshope, Chief Operating Officer (COO): BBI/SENTECH, presented the policy context for the establishment of the State Digital Infrastructure Company (SDIC)

See presentation attached for further detail

Discussion

Ms L Bebee (ANC, KZN) said that it appeared that the process of merging the two entities would require a considerable amount of capital, especially because of BBI’s liabilities. She wanted to know if the merger process was fully funded. If it was, would the money be obtained from National Treasury or from equity partners? How long would it take to complete the merger process of all the entities?

Mr A Arnolds (EFF, Western Cape) thanked the Department for the update on the merger of the two entities. He commented that the ability of any entity to run efficiently and effectively depended on good governance, the absence of corruption, and was an entity that all South Africans could be proud of. He wanted to know the concerns raised by the entities in respect of the merger. He also wanted to know how the merger would impact on workers, and if there would be an increase in the number of workers.

Mr C Smit (DA, Limpopo) wanted to know how much would be spent to finalise the entire merger process. He observed that there could not be multiple staff employed in the top and middle management level, and asked about the cost implications of reducing the number of these employees. This was aimed at avoiding a duplication of positions and the resultant labour issues that may be associated with it.

Mr Smit also asked about how the merger would impact on Elon Musk’s Starlink satellite network, and what the relationship between SENTECH, BBI and SpaceX’s Starlink project was.

Mr Nhanha observed that the merger of the entities must be handled with all seriousness. He recalled that shortly before the 2016 local government elections in South Africa, a lot of municipalities had been merged. On paper, the mergers seemed adequate, but a lot of difficulties had been witnessed. Merging a financially struggling municipality with a fairly stable municipality would be more difficult, however. He noted that the merger of the municipalities had caused grievous setback to those municipalities, and he wanted to know if any lessons had been learnt, and if research had been done on this type of merger.

He noted the danger of delaying the merger process, and how it could destabilise both entities when the staff were unsure about their employment status. He asked about the online recruitment of a CFO for SENTECH, when BBI already had a CFO. He advised that it would be prudent for both entities to suspend the recruitment process until the merger in order to avoid a duplication of positions.  

He suggested that the Committee should receive a briefing on the business case once it had been taken to the Minister for approval.

Ms T Modise (ANC, North West), said that a merger of two or three entities was going to affect the employees. She wanted to know if the entities and the Department had had consultations with the unions and if the unions had consented to the merger. How many staff would be affected, and had the Department considered the critical skilled staff who should be retained in the entity. She wanted to know what would happen to the other employees.

Responses

Mr Andrew Matseke, Chief Executive Officer (CEO), BBI, responded that BBI was in the process of developing the strategy for the entity, and part of the outcome of that process would be to indicate the level and type of funding that the entity would require. The approach of the merger was to ensure that BBI and SENTECH, when merged, could grow better in terms of revenue and profitability than they would have grown in their current form, as separate entities. The quantum of funding that would be required would also be determined in due course. The funding that would be required would be to fund growth, and not to make additional investments in infrastructure. Set up funding would consist of the lowest proportion of funding that would be required, while the bulk of funding would be for investment in infrastructure to enable the entity to grow.

He explained that he could not determine where the funds would be obtained from, but a business strategy would be formulated to this effect. However, he projected that the best option for the infrastructure funding would be institutions such as the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC), which was a shareholder in BBI.

Mr Musetha said that the entity was being set up to be a Schedule 2 entity, so that it would be able to raise funding from the private sector and the banks.

Mr Tebogo Leshope, COO ,SENTECH, said that each growth project would be evaluated on a case-by-case basis and the required funding mechanism available at the time. He commented, however, that a merged entity improved efficiency, and an efficient entity would yield better shareholder value in the long term.

Dr Mashilo Boloka, Chief Director: Public Entities Oversight, DCDT, explained that the way to mitigate cost would depend on the option taken for the merger. The options available were a complete merger of the two entities, which would require a lot of money for integration, or secondly, a case where the stronger company absorbed the other one for a start, thereby saving on marketing and communication costs. He said that decisions were currently under way on the option to take, while reviewing their advantages and disadvantages, and the cost implications and regulations that should be complied with.

Options were also being explored on how the merger could be completed speedily in order to avoid the danger of losing key staff members if the merger process dragged on for too long. The current contracts of employees were short-term and aligned to the timeline of the merger. He explained that because the entity would need to continue to run until the merger was complete, the recruitment was necessary, but would be done in line with the merger timeline.

Mr Musetha stated that this financial year had been allocated to the legislative process. The actual merger would be concluded only at the end of the financial process, towards the end of 2022/23.

Mr Matseke said that the merger had a growth motive, and was being done so that the two entities had a better chance of growing compared to how they were currently performing. BBI was a broadband company that offered connectivity that was based on optical fibre networks, and SENTECH was a predominantly wireless environment in terms of technology, as well as satellite, so the technical skills within the two entities complemented each other, and the skills in both entities would be needed. Not much rationalisation or retrenchment was expected, especially in the technical environment, which constituted about 60% of the labour force in BBI, and redundancy was not expected to arise.

However, it was possible that there may be some duplication in the area of support services, finance, human resources and administrative functions. Those at the executive level were on fixed term contracts which ended in 2022. If either of the CEOs was chosen for the new entity, the contract of the other CEO would have come to an end. It was not anticipated that there would be any challenges with employees at the executive level, but there may be issues at the middle management level in respect of support and administrative services.

Mr Leshope added that the merging of BBI and SENTECH was just an optimisation of their complementary strategic capabilities and an enhancement of the value chain. The strategic capabilities of each entity would remain in existence, and there would be no replacement done. The larger part of the functional team would still be required, and as the entity experienced growth, there would be a need to optimise human capacity. At the senior level, there were two CEOs, COOs and CFOs, and their efficiency and alignment could be achieved based on the basis of their fixed contract. There was potential for significant growth. The market and many centres still needed to be connected, and more people would be needed to enable and sustain the operation of the new company.

Mr Musetha said that the Minister had met with all the employees, starting with those at SENTECH, and had outlined to them the strategy of the merged entity, reassuring them that people would not be fired and lose their jobs. She had also indicated that there would be a need for a skills audit and an assessment by both entities so that it could be the established what skills were required.

There had been follow-up discussions with the unions at BBI, because they had raised some concerns around the skills audit. The reasons behind the audit were explained to them, which was to ensure that there were no gaps when the entity started functioning fully.

Mr Matseke said that there were no projected set up costs, because the two entities were already functional. BBI was currently occupying an office that was rented, while SENTECH was in a corporate office which it owned. The option where the merged entity would move into the building owned by SENTECH was being considered in order to optimise cost. Also, SENTECH had the larger number of staff. It was not anticipated that the merger would require financial assistance from shareholders and National Treasury.

He added that when both entities were merged, there would be no duplication, except maybe minimally in the area of support services. The details had been reviewed with the labour union representing the majority of workers at BBI.

Mr Leshope said that SENTECH was exploring launching a South African-owned satellite in order to reduce the cost to communicate. A business case had been developed to launch a satellite, mainly to provide media and connectivity services. However, the biggest challenge was the lack of satellite operators, because most of the operators were in foreign companies, and satellite rentals were currently the biggest expenditure.

Mr Matseke cautioned that lessons should be learnt from other mergers that had failed, and that the transaction advisers should also be engaged to help with the strategy development. He said that SENTECH was in a healthier financial position than BBI, and the biggest challenge for BBI was the shareholder loans. The approval needed to convert the shareholder loans into equity (more shares) was ongoing, to enable BBI to be in a healthier financial position.

He said that Mr Ebrahim Patel, Minister of Trade and Industry, had given the IDC permission to convert its shareholder loan in BBI into equity. The process had started, and once the audit was received, the shareholder loans would be converted to equity, bringing the net asset value of BBI to R1.2bn. Efforts were being made to ensure that both entities go into the merger in a very healthy position from an asset and liability point of view, and the focus would be on the agenda to drive growth.

Mr Matseke said that going forward, BBI and SENTECH would need to start working together in pursuing opportunities in the market. The chairpersons of the BBI board and SENTECH would also be approached, so that a joint team of both entities could be set up. The joint entity would consider the various opportunities on which collaborating could commence, and by the time the merger commenced, a culture of working together would already have been built.

Mr Matseke agreed that a delayed merger would cause instability, and there had already been resignations within BBI, especially from skilled people who were fearful of how the merger would affect them. It was in the interest of both entities that the process of the merger was speeded up so that the people who were skilled were not lost.

Mr Musetha said that the assessment had been conducted and the Department had granted BBI the conversion to equity, and concurrence had also been received from the Minister. The BBI would therefore be going into the merger in a better financial position.

Mr Leshope said he thought the merger was sustainable. The potential for the new company’s growth was quite positive within the ICT and telecommunication sector, in view of the consolidation of assets and the strength of the market.

Regarding the CFO’s appointment on the eve of the merger, he said that it was a short-term contract which had been done with consideration of the merger. Issues of the merger and human capacity were taken seriously at SENTECH.

Mr Matseke confirmed that he had led the labour engagements at BBI. Employees had been told that the merger process was a growth-driven measure. Assessments had been conducted, and these had indicated that more skills would be needed, particularly on the technical side. He noted that the skills in both entities would complement each other, rather than compete with each other, and that there was a low risk of redundancy and retrenchment.

He also stated that when the current Minister, Ms Stella Ndabeni-Abrahams, came into the portfolio, one of the programmes she had initiated was a skills assessment within the departments and entities reporting to her. A skills assessment and audit had been conducted within the sector, and some areas where training and development of employees was needed had been identified. The outcome of the skills assessment was a standard agenda item with labour. It was not expected that the issue of skills would be a challenge which could hinder its employees from inclusion in the merger.

The employees of SENTECH were regularly updated on the development around the merger and given an opportunity to contribute towards it. A team was also set up, based on selected representatives from various departments of the organisation. A skills audit was conducted to enhance digital capabilities and align them with the fourth industrial revolution era, and meet with future demand. There was also a standing agenda which included human capacity development and intervention with more than 1 000 digital intervention servers. This would enable SENTECH to position itself for the new company.

Ms Jordan-Dyani said she had held individual engagements with the entities to ensure that both were financially viable. She commented that the impact of the merger would be in terms of the senior management, which was aligned to their contracts. For technical skills, SENTECH would want to preserve as many of its staff as possible. It had also been resolved that an aggregation of assets and licences would ensure better performance of the entities.

There were some critical positions that had to be filled in line with government requirements and compliance. The infrastructure company would be proposed to Cabinet in this financial year, and would be introduced to Parliament by the end of March 2022.

The Chairperson observed that there was an issue around a cooperative strategy that was still going through processes. It would be important for the Select Committee to a receive briefing on it. The Committee would also need to receive quarterly briefings on the merger, to enable it to supervise and carry out its oversight responsibilities. The Department would also need to provide the Committee with a report on the satellite issue, because the country needed to have its own satellite and not rely on satellites from other countries.

Ms Jordan-Dyani said the Department would come back and present on the business case and status of the bill. The Department was exploring the satellite issue, together with the Department of Science and Innovation. There was a launch programme that was done on satellites, and was geared towards building satellite communication services. She noted, however, that there were still areas where connectivity was still needed, especially in remote areas. A satellite therefore remained very critical for the country and the region. The Department intended to launch a South African-owned satellite, which would provide the various services to the region. It was working with SENTECH to ensure that a South African-engineered satellite was launched.

Committee minutes

The minutes of the meeting of 17 February 2021 were presented and adopted.

Chairperson’s closing remarks

The Chairperson said that the programme for the second quarter had been sent to Members by the secretariat. The focus of the quarter would be more on public enterprises as well as the issue around the annual reports of the two departments. Because of the unavailability of space in the second quarter, there may be difficulties in including communication, but it would be included once an opportunity presented itself. The budget would also be dealt with in the second quarter. Consideration would also be made as to whether more time would be needed to engage on some of the matters in the programme for the second quarter.

The meeting was adjourned.