BROADBAND INFRACO BILL 2007 Select Committee on Labour and Public Enterprises Cape Town 10 October 2007 Use balance scorecard format and show measurement For DPE strategy analyse measurement – constraints, shifts and focus for remaining period Input in SOE teams to be reflected in scorecards

Table of Contents Background Introduction: Why Infraco Introduction of the Bill Purpose of the Bill The Bill: Servitude rights for Infraco The Bill: Expropriation by Minister Implications of the Bill Conclusion

Background Eskom Holdings Limited, through its subsidiary Eskom Enterprises (collectively: “Eskom”) and Transnet Limited (“Transnet”) developed and deployed a national long distance optic fibre network in anticipation of the establishment and licensing of Neotel (previously called SNO Telecommunications) (Pty) Ltd (“Neotel”). Government determined that instead of disposing of the Full Services Network Assets comprising the national fibre optic network (“FSN”) to Neotel, Government should continue to own and invest in critical infrastructure such as communications infrastructure in order to leverage such infrastructure for economic growth. Eskom and Transnet have continued participating in Neotel as shareholders in accordance with the provisions of the now repealed Telecommunications Act, 103 of 1996.

Introduction Broadband costs in South Africa are prohibitively high. Investigations into the high broadband costs in South Africa compared to international counterparts revealed that the largest connectivity costs are attributable to national backbone connectivity and international connectivity. The logical conclusion was to intervene to address these national backbone and international connectivity cost structures. Therefore, as part of its strategy to accelerate economic growth, Government has decided to expand the availability of broadband access to bridge the digital divide and contribute to lowering the costs of doing business in South Africa.

Introduction (cont.) The proposed model was an SOE (Infraco) that will own the FSN. The Minister of Public Enterprises (“Minister”) agreed with Eskom and Transnet to consolidate the FSN into an Eskom subsidiary, Rosherville Vehicle Services (Pty) Ltd (“RVS”) and for Government to purchase the shares of RVS. RVS will change its name to Broadband Infraco (Pty) Ltd (“Infraco”). Infraco will operate a broadband network and provide broadband network services that will provide access to undeveloped areas and bandwidth requirements for specific projects of national importance, including, amongst others, scientific initiatives and video streaming of international events.

Review: Basis for InfraCo Intervention

DPE Study South Africa significantly lags behind its international counterparts in terms of ICT penetration and the rate of new technology adoption. Broadband penetration relative to international benchmarks is virtually non-existent and significantly more expensive Broadband costs in South Africa are prohibitively high. Investigations into the high broadband costs revealed that the largest connectivity costs are attributable to national backbone connectivity and international connectivity. The logical conclusion was to intervene to address these national backbone and international connectivity cost structures.

Current Status 1 National Long Distance = Telkom Monopoly, unlikely to change for a number of years to come even with the ECA Government needs to intervene here 2 Metro & Access Networks = Increased Competition likely here under the ECA because lots of players will make local investments. NO NEED FOR GOVERNMENT TO INTERVENE, so NO INFRACO here 2 3 International Marine Cable Connectivity = SAT-3 monopoly, nothing likely to change here soon. and here what InfraCo proposes to do 3 And NOT here, where the private sector is already competitive 1 3

Licensing the SNO won’t help History in numerous other countries have proven The Kinked Demand Curve Model of Oligopoly Monopolistic Price, Cost Output Level (Q) Duopolistic* Oligopolistic With Telkom as the ONLY other infrastructure competitor there is NO incentive for a second commercial operator to set prices significantly below Telkom’s Source: Douglas [Harvard], Accenture

InfraCo Long Distance Pricing InfraCo intends to deliver a 95% discount off current NLD rates within 5 years InfraCo intends to price access to infrastructure by maintaining a utility level IRR of 16%. The MORE bandwidth the industry uses, the CHEAPER it will get.

Introduction to the Bill On 18 April 2007 a full cabinet meeting confirmed and approved the submission of the Infraco Bill to Parliament for adoption The draft Bill was published in Government Gazette No. 29879 dated 11 May 2007 and the deadline for submission of public comments was 11 June 2007. The Bill was certified by the State Law Advisors on 21 June 2007

Purpose of the Bill The purpose of the Bill is to provide for the (a) transfer of the Infraco shares and interests from Eskom to the State; (b) main objects and powers of Infraco; (c) borrowing powers of Infraco; (d) servitudes and additional rights in favour of Infraco; (e) expropriation of land or rights in land by Minister on behalf of Infraco; and (f) future conversion of Infraco into a public company. The Bill records that the main objects of Infraco are to expand the availability and affordability of access to electronic communications, including but not limited to underdeveloped and under serviced areas, in accordance with the Electronic Communications Act and commensurate with international best practice and pricing, through the provision of— (a) electronic communications network services; and (b) electronic communications services. Subject to the Public Finance Management Act, Infraco may borrow money, issue a guarantee, indemnity or security or enter into any transaction necessary in order to achieve its objects.

The Bill: Servitude rights for Infraco The Bill also authorises Infraco to exercise all of the rights attaching to the FSN, primarily servitude rights. The Bill extends Eskom’s servitude to electronic communications and Eskom and Transnet are required to allow Infraco, upon agreement, to use the servitudes to provide electronic communication network services to fulfill its purpose and mandate under the Bill and its founding documents. Transnet, which owns the land on which the FSN sits, is required to register servitudes on its land in favour of Infraco Compensation payable by Infraco for the servitudes will be paid in accordance with the Constitution.

The Bill: Expropriation by Minister The Bill further authorises the Minister to expropriate land on behalf of Infraco and pay compensation as contemplated in the Constitution. The Minister’s expropriation authority is limited by the requirement that the land must be reasonably required for public purposes or in the public interest and to attain Infraco’s objects. Further, Infraco must show the Minister that it is unable to acquire the land on reasonable terms and Compensation will be paid in accordance with the provisions of the Constitution.

The Bill: Expropriation (cont.) The Bill provides that Infraco will become the owner of such expropriated land; Infraco will pay any prescribed fees, duties and other charges as if it had purchased the property; Infraco will refund all costs incurred by the Minister in expropriating the land; The relevant provisions of the Expropriation Act apply, subject to the compensation provisions of the Constitution; All unregistered rights relating to the expropriated land must be expropriated separately; In assessing the payable compensation as contemplated in the Constitution, the applicable provisions of the Expropriation Act must be applied insofar as it is just and equitable to do so; The expropriation provisions of the Bill apply only for as long as the State is the majority shareholder of Infraco.

Implications of the Bill The Bill authorises Government to acquire the shareholding in Infraco The Infraco Bill differs from the other legislation the Department has tabled before Parliament because of the nature of the intervention Government seeks to make through Infraco, as well as the communications sector The conversion of Infraco into a public company will enable Infraco to access funding from the private sector particularly given the dynamic nature of the sector in which it participates, the significance of its infrastructure and the critical role of such infrastructure and services for the South African economy

Conclusion QUESTIONS AND ANSWERS -