Rationalization Defined

1. Rationalization Defined “Rationalization means organizing/reorganizing something into a logically coherent system, often to make it as efficient as possible.” Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

2. Overview of SOC Rationalization • Alignment of SOCs at all spheres of Government in order to achieve the developmental objectives and aspirations of South Africa. • The PRC calls for continued in-depth micro assessment of SOCs to assist the merging of many entities. • Review of the Market Structure • Analysis of the benefits and cost of infrastructure duplication • The need for common carrier network, with possibilities of structural separation of vertically integrated incumbent. • One of the primary objectives of SA Connect is to ensure that ICT SOC’s achieve better coordination through the clear definition of roles, the integration of planning, monitoring and evaluation and the development of institutional capabilities. • Alignment/Rationalization of ICT SOCs in order to achieve the developmental objectives and aspirations of South Africa. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

3. Some critical findings of PRC on SOEs • There is a lot of duplications within the Government Portfolio of State Owned Enterprises • There is a need to imbue the SOEs with a developmental agenda. • Most SOEs are characterized by poor governance and a lack of clear understanding of their mandates in context of a developmental state • The funding mechanisms of SOEs are very weak – leading to poor performance in the execution of their socio-economic mandates • The rationale for establishing State Owned Companies in instances seems to have largely been informed by all manner of wrong considerations • As a result of duplications, there are a lot of inefficiencies and lack of effectiveness and wastage of scarce financial resources • There is serious lack of co-ordination among SOCs that should compliment each other Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

4. Broader reform work informed by the PRC • The Department of Public Enterprises is leading the work to implement recommendations of the PRC on SOEs • The DTPS SOC Rationalization work is one of the flagship projects of the Government Shareholder Model • The DTPS’ rationalization project is mainly centred around Principle 20 of the PRC which directly encourages the rationalisation of SOEs as a mechanism to extract efficiencies and to ensure maximum impact on Government objectives. • Principle 18 also encourages the collaboration of SOEs to extract synergies and to ensure collective responsibility toward service delivery. • At a high level, the PRC report advocates for the appointment of a SOE Reforms Committee that would amongst other things, develop an over-arching national strategy on SOEs (with clear objectives, sector categorisation and performance measurements). Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

5. SOCs within the Portfolio of the MTPS • Government has a stake in a number of SOCs within the Portfolio of the Ministry Telecommunications and Postal Services • Some of the SOCs such as Sentech, SAPO, Sita, BBI, USAASA and Nemisa are hundred percent owned by Government • Government owns significant shareholding in some SOCs such as Telkom SOC Ltd (39,8% direct plus approximately 12% PIC shareholding = 51%) • The Government owns 74% stake in Broadband Infraco and the remaining stake is owned by Government through the IDC • In addition Government owns 13.9% in Vodacom (the largest mobile operator in the country) • Some of these entities such as Telkom and Vodacom in which Government has a stake are listed in the Securities Exchange and also have other shareholders aside of Government this regulatory implications Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

6. ICT SOC Landscape • In the context of a slow rate of economic growth, it is crucial that state resources are effectively and efficiently used. • The overlapping mandates of SOC’s in the ICT sector represent an unnecessary duplication. • Telkom SOC Ltd, Broadband Infraco, Sentech, SITA, USAASA and SAPO are all capable of playing a role in delivering broadband: • Telkom SOC Ltd, SITA, Sentech are all equipped with i-ECNS and i-ECS licenses which allow them rollout of network infrastructure services at the wholesale level, as well as offer their portfolio of retail services to end customers at the retail level. • These three SOCs have the license capability to offer exact same services on behalf of the state at a national level. What sets them apart is the resources they have to their disposal to offer services, for example spectrum, exchange footprint, international and domestic network infrastructure etc. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

7. ICT SOC Landscape Cont… • Broadband Infraco has an i-ECNS license that allows it to offer wholesale network services but is not in possession of an i-ECS which would allow it to connect end customers and offer internet service. • Broadband Infraco only needs to partner with another i-ECS licensee in order to be on par with the three other in terms of being able to offer Broadband Service This would lead to all four SOC’s i.e.Telkom, Broadband Infraco, Sentech and SITA having similar licences. • USAASA on the other hand is mandated to pay subsidies through USAF to any ECNS licensee for the purpose of financing the construction or extension of electronic communications networks in under-service areas. • This is further mandated to be done through a competitive bidding process. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

8. Objectives of SOC Rationalization • The objectives of SOC Rationalization are to:- • Ensure that the ICT sector is fundamentally transformed and placed in its rightful position to support economic growth • Ensure that the roles and responsibilities of SOC’s in the rollout of various aspects of the broadband capabilities. • Remove the administrative bottlenecks that constrain the rollout of network infrastructure. • Yield the benefit of coordinated infrastructure built programmes that will avoid unnecessary duplication thereby contributing to national objectives more efficiently and effectively especially where civil works have been undertaken to deliver broadband infrastructure. • Align SOC’s mandates with the radical vision of SA Connect; Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

9. Objectives of SOC Rationalization Cont... • Avoid undue competition between state owned entities involved in the broadband value chain; • Minimise the number of state owned entities involved in the implementation of broadband in an effort to improve coordination; • Allow for the reuse of existing infrastructure that is under state control; and • To enable fair competition at the services layer of the broadband value chain. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

10. Institutional Arrangements • The Department established a SOC Rationalisation Steering Committee (“the Committee”) chaired by the Director-General and constituted by representatives of the executive leadership of each of the SOCs (Broadband Infraco, Sentech, SITA, USAASA and SAPO) and a Technical Team (“the Team”) consisting of officials from the Department and representatives and the affected SOCs to effectively facilitate the rationalization process: • The Committee’s main roles are: • Identification of relevant issues, including but not limited to policy, regulatory, legal, economic, business, technology, financial, and operational issues that may be impacted by the rationalization of the relevant SOCs, as applicable, and highlighting these issues to the DTPS. • The Steering Committee is supported by a duly appointed Technical Committee of legal, technical and commercial experts appointed from the SOCs represented. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

11. Progress on SOC Rationalization to date • In executing the rationalization process, the Steering Committee considered that the SOC Rationalisation process as undertaken by the Department should fall within the guidelines of the PRC report. • To date the Technical Committee has completed the following activities: • An analysis of the Presidential Review Committee Report on State Owned Entities and its application to SOCs in the ICT sector • A definition of high-level principles that should guide the rationalisation of SOCs in the ICT sector • An analysis of the policies and legislations that enable and mandate the existing SOCs • An analysis of the technical and commercial capabilities of the SOCs • The analysis above will form part of further work that will undertaken and on which further advise will be sought on how to take forward the SOC rationalisation project. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

12. Progress on SOC Rationalization to date Cont… • During the January State of the Nation Address, the President announce the designation of Telkom as a lead agency in the implementation of Broadband. • The above means that Telkom will be main but not only company that implements SA Connect • Furthermore, President also announced that the implementation of South Africa Connect will commence earnestly in 2015/16 • Work to implement SA Connect is at advanced stages 8 districts have been identified to Roll out Broadband. • In June 2015, during the announcement of its Annual results, Telkom also announced the separation of its wholesale and retail businesses – this is an important milestone. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

13. Progress on SOC Rationalization to date Cont… • In engagements with Broadband Infraco, the company has been instructed to preserve its value in preparation for the SOC Rationalisation • Pursuant to the above, Broadband Infraco is currently reviewing its business and financial plans • Engagements are taking place between Government and the IDC as the 26% shareholder in Broadband Infraco share views on the future of this company. • The Broadband Infraco has been instructed to undertake a valuation exercise in preparation for the SOC Rationalisation exercise. • To date USAASA has provided broadband connectivity to four municipalities in KZN, Eastern Cape, Northern Cape and North West provinces. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

14. Progress on SOC Rationalization to date Cont… • Another two municipalities in Limpopo and Mpumalanga will be connected in 2015/16 • Over the past few years, USAASA, has also been undertaking a programme of schools connectivity. • Among other functions, USAASA has a function to manage the Universal Service and Access Fund, which is an important instrument in the endeavours to ensure universal service and access to ICTs. • In the 2015/16 budget vote statement, the Minister of Communications announce that the intention to increase the levy towards charged on Telecommunications operator towards USAF from the current 0.02% to 1%. • The increased levy will be utilised towards providing broadband connectivity to underserved areas. • The role of USAASA is complementary to the efforts of implementing SA Connect. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

15. Progress on SOC Rationalization to date Cont… • The South African Post Office possesses an unmatched network of points of presence throughout the country, most of which is in rural areas and townships, which are underserved • It is the intention of Government to utilise this extensive reach of the South African Post Office to bring Broadband closer to these communities. • Having completed and obtained Cabinet approval of its turnaround plan, SAPO is now hard at work finalising the implementation plan, which include work on its role in the implementation of South Africa Connect. • Sita is currently working on a review to streamline it functions in line with the intention to focus its work on the core areas of e-government, government data security and IT procurement for government. • Sentech in its high sites and satellite capacity can play an important role in the implementation of SA Connect. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

16. Further work to be done • An assessment of various options, synergies and an optimal plans of implementation of SA Connect; • Exploration of various elements involved in the rationalization transaction including but not limited to technical, operational, legal, financial, strategic, and policy issues; • Evaluation of a number of rationalization options and asses the short, medium and long term sustainability of each option; and • Creation of an integrated strategic entity that will best serve the ICT national interest & SA Connect. Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development

17. Thank you Making South Africa a Global Leader in Harnessing ICTs for Socio-economic Development