sentech limited presentation to the portfolio committee on communications on its briefing

DD/krs/Presentation to PCC on Sentech's briefing 2009/10 budget FINAL 12 JUNE 09

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SENTECH LIMITED

PRESENTATION TO THE PORTFOLIO COMMITTEE ON COMMUNICATIONS ON ITS BRIEFING

2009/10 BUDGET, STRATEGIC PLAN & PRIORITIES

Date: 12 June 2009

2DD/krs/Presentation to PCC on Sentech's briefing 2009/10 budget FINAL 12 JUNE 09

SENTECH TEAM

• Chairperson: Mr. Colin Hickling

• Chief Executive Officer: Dr. Sebiletso Mokone-Matabane

• Chief Financial Officer: Mr. Siddique Cassim

• Chief Operating Officer: Ms. Beverley Ngwenya

• Executive Regulatory & Mr. Dingane DubeGovernment Affairs:

• Specialist Stakeholder Mr. Monde NdleleniRelations:

• Company Secretary: Adv Rachel Ramokhufi

• Non – Executive Director: Mr. Tau Mashigo

• Non – Executive Director: Dr. Yvonne Muthien


OVERVIEW

1. SENTECH TEAM2. SENTECH MANDATE3. PERFOMANCE AGAINST 2008/9 STRATEGIC

OBJECTIVES4. 2009 – 2011 CORPORATE PLAN5. STATUS ON KEY PROJECTS6. NATIONAL WIRELESS BROADBAND NETWORK

(NWBN)7. DINALEDI SCHOOLS8. PARTICIPATION IN UNDERSEA CABLES9. SQUARE KILOMETRE ARRAY (SKA)10. CONCLUSION


SENTECH MANDATE – ELECTRONICCOMMUNICATIONS ACT 36 OF 2005 (“the ECA”)

• The ECA amended the main object of Sentech to incorporate convergence of broadcasting and telecommunications. Accordingly, the ECA stipulates that the main object and business of Sentech “shall be to provide electronic communications services and electronic communications network services…”


KEY STRATEGIC OBJECTIVES 2008/9: 2008 – 2011 CORPORATE PLAN

OBJECTIVES STATUS AS AT 31 MARCH 2009

NETWORK PERFORMANCES:• Availability of signal distribution for TV

transmission = 99.8%• Availability of signal distribution for radio

transmission = 99.7%• Availability of VSAT network = 99.6%• Availability of Carrier of Carriers network = 99.6%

Achieved.

DIGITAL TERRESTRIAL TELEVISION:• Digital switch on – 1 November 2008• 40% population coverage by 31 March

2009. *subject to timeous transfer of total

funding requirements and publication of Digital Migration Policy.

Achieved.• Switch on achieved on 30

October 2008.• Due to the delays in the

finalisation of a frequency plan and DTT migration regulations, only 33% was achieved by 31 March 2009.


STRATEGIC OBJECTIVES 2008/9: 2008 – 2011 CORPORATE PLAN


2010 FIFA WORLD CUP SOCCER:• Acquire land at NASREC to build the

second teleport.• Finalise the detailed designs of the

second teleport.

2009 CONFEDERATIONS CUP:• Provide satellite infrastructure to the

2009 Confederations Cup stadiums.• Secure the required satellite bandwidth.

Achieved.•The land at NASREC has been secured on lease from the Department of Public Works. •The network/technical designs for the second teleport have been finalised.

Achieved.Mangaung, Royal Bafokeng, Ellis Park and Loftus Versfeld completed.

RETAIL BROADBAND:• Exit retail broadband – MyWireless and

Biznet.

Achieved.Implementation is still in progress. Financial write-off of assets effected in the 2008/9 Annual Financial Statements.


STRATEGIC OBJECTIVES 2008/9: 2008 – 2011 CORPORATE PLAN


NWBN:• Approval by DoC and National Treasury

of the business and funding model.• implementation of NWBN that would

primarily focus on schools, hospitals, clinics, Thusong Post Offices and Government in urban, rural and under serviced areas by 31 March 2009;

• Subject to approval of business and funding model, connect 233 Dinaledi Schools.

• Business and funding model submitted to the DoC and National Treasury based on funding requirement of R3.1 billion.

• Dinaledi Schools: The DoC is engaging with the user-departments to finalise their requirements. This includes confirming the list of schools. Thereafter provide them to Sentech to determine the extent of the rollout that can be achieved with the R500 million.

FINANCIAL PERFORMANCE:• Loss of R59 million in 2008/2009• Financially sustainable by year 7

(2015/2016), with no dependence on the fiscus on the basis that the Consolidated Business Model (as per the Corporate Plan) is approved.

Achieved.Sentech projected a before tax profit (excluding extraordinary items e.g. impairments etc.)


OTHER ACHIEVEMENTS: 2008/9 FINANCIAL YEAR

• Universal access to television and radio: Rolled out 9 low power transmitter sites in the Karoo and Kgalagadi. More sites underway in 2009/10.

• Commissioned 19 Community radio stations – Gauteng, Mpumalanga, Eastern Cape, Western Cape, Free State and Kwazulu Natal; and 1 Community TV.

• Bridging the digital divide:i. Mpumalanga Schools projectii. VSAT connections at Post Officesiii. Mobile Home Affairs Officesiv. South African Weather Services


2009 – 2011 CORPORATE PLAN: ENVIRONMENTAL OVERVIEW (EXTERNAL)− the Department of Communications (DoC), has to balance the

interests of Sentech, as its shareholder with its role as policy maker.

− There is a need for consensus between the Minister of Communications / DoC and Minister of Finance / National Treasury with regard to the mandate of Sentech, specifically on the telecommunications business. This has extended discussions over the years, to the detriment of Sentech. There is a view within Government that Sentech should not compete with private operators as it is funded from public funds.

− There is lack of coordination on an overarching ICT strategy, implementation plans and associated budgets with various Government departments and structures having distinct competencies at local, provincial and national level. E.g. Municipalities, Infraco, SITA etc.


2009 – 2011 CORPORATE PLAN: ENVIRONMENTAL OVERVIEW (EXTERNAL) cont.

- ICASA intends to regulate Broadcasting signal distribution tariffs. Sentech engaged a reputable international consulting firm to assist in formulating the new tariff structure to be implemented in the digital environment.

− Sentech requested funding from the State for networks of frequencies (multiplexes) for dual illumination

− The State has already allocated R330 million towards operational costs associated with dual illumination

− There is a short fall of R558 million− Should the State make up for the short fall, then broadcasters will

not pay Sentech to transmit digital signal, during dual illumination period.


2009 – 2011 CORPORATE PLAN: ENVIRONMENTAL OVERVIEW (INTERNAL)

− Sentech maintains its broadcasting and telecommunications networks effectively and efficiently, based on its highly experienced technical teams. The Sentech networks currently and for the foreseeable future will operate at and above customer service level.

− Aged radio networks (FM, SW, AM) which will need to be upgraded.

− Sentech is affected by the national skills gap. This has resulted in operators poaching staff from each other with some offering share schemes and huge remuneration packages. Staff recruitment, retention as well as succession planning is therefore a challenge for the Company.

− Key critical technical staff is close to retirement. In-house skills development and skills transfer programmes are therefore very critical.


2009 – 2011 CORPORATE PLAN

• Strategic objectives:

- focus on key competency - broadcasting signal distribution - by defending current market and expanding services into other African markets.

- Exit retail broadband (as per directive from DoC/National Treasury) by terminating MyWireless and Biznet.

- Consider other business/funding models for the rollout of NWBN in order to achieve Government objectives.


2009 – 2011 CORPORATE PLAN cont.

• Strategic objectives:

- Implement a turnaround strategy for VSAT which is a platform that we are using to provide connectivity to Government Departments/agencies e.g. Mpumalanga Schools project, Mobile Home Affairs offices etc. The turnaround strategy is based on two elements: Government business and multinationals.

- Implement a turnaround strategy for Carrier of Carriers.


2009 – 2011 CORPORATE PLAN: INCOME STATEMENT

Summarised Income Statement

Budget Forecast Forecast Forecast2009 2010 2011 2012

Revenue 944,548 915,487 1,128,283 1,283,579

Operating Costs (994,463) (1,010,702) (1,015,168) (1,056,715)

Operating Profit/(Loss) (49,914) (95,215) 113,115 226,864

Interest Received 3,000 58,728 3,000 3,000Finance Costs (12,243) (15,867) (10,890) (6,940)

Profit/(Loss) Before Taxation (59,157) (52,353) 105,225 222,924


2009 – 2011 CORPORATE PLAN: BALANCE SHEET

Balance Sheet (Consolidated R'000)

Budget Budget Forecast Forecast

2009 2010 2011 2012

Assets

Non-current assets 1,389,261 1,223,702 1,982,537 2,183,132

Property, Plant and Equipment 1,373,609 1,016,448 1,777,950 1,981,212

Long Term Loans 2,500 463 463 463

Intangibles 12,989 206,791 204,124 201,457

Investments 163 - - -

Current Assets 101,361 305,614 292,183 324,090

Inventory 22,418 112,091 123,301 133,165

Trade and Other receivables 57,863 83,753 92,887 115,571

Prepayments and Deposits 9,420 12,826 14,109 15,237

Cash - Ringfenced Funding 11,660 96,944

Cash and cash equivalents - - 61,887 60,117

1,490,622 1,529,316 2,274,720 2,507,222

R'000

Total Assets


2009 – 2011 CORPORATE PLAN: BALANCE SHEETEquity and Liabilities

Capital and Reserves 414,385 382,721 577,294 786,884

Share Capital 2 2 2 2

Share Premium 75,890 75,890 75,890 75,890

Revaluation and Other reserves 443,524 464,213 482,561 469,227

Retained Earnings (105,031) (157,384) 18,841 241,765

Non-current Liabilities 766,444 702,769 714,869 715,637

Borrowings 97,669 81,669 64,317 45,015

Retirement Benefits Obligations 95,469 107,469 119,469 131,469

Government Grant 507,117 253,477 270,929 279,000

Licence Obligation 10,000 200,000 200,000 200,000

Deferred Tax Liability 46,349 60,154 60,154 60,154

Finance Lease Liability 9,840 - - -

Current Liabilities 309,792 443,827 982,558 1,004,701

Trade Payables 45,445 86,345 72,402 93,760

Sundry Payables 91,854 101,039 89,581 94,060

Short Term Portion of LTL 0 24,921 26,416 27,737

Provisions 19,330 57,676 61,136 64,193

Cash and Cash Equivalents 153,164 173,846 733,022 724,951

1,076,237 1,146,596 1,697,426 1,720,338

Total Equity and Liabilities 1,490,622 1,529,316 2,274,720 2,507,222

Total Liabilities


2009 – 2011 CORPORATE PLAN: BALANCE SHEET

Financial Indicators


2009 2010 2011 2012

Gearing Ratio 2.60 3.00 2.94 2.19

Operating profit margin (%) -5% -10% 10% 18%

Net profit margin (%) -6% -6% 9% 17%

Return on Equity/Net assets (%) -13% 27% 39% 16%

Debt/Equity ratio (%) 185% 184% 124% 91%

Debt/Equity ratio (%) excl Govt Grant 63% 117% 77% 55%


2009 – 2011 CORPORATE PLAN: CASH FLOWSentech LtdCash flow statement


2009 2010 2011 2012

CASH FROM OPERATIONS (130,921) 99,882 236,724 340,370

Cash Generated (Utilised) (117,442) 120,749 247,614 347,310

Finance Costs (13,480) (20,867) (10,890) (6,940)

CASH UTILISED IN INVESTMENT ACTIVITIES (81,007) (62,697) (1,063,182) 394,870

Property, Plant and Equipment acquired (226,187) (111,424) (1,242,834) 381,132

Intangibles acquired - (200,000) 2,667 2,667

Proceeds on disposal of Fixed Assets - - - -

Interest Received 94,303 58,728 3,000 3,000

Increase in Government Grants 40,877 0 173,985 8,071

ICASA Licence Fees 10,000 190,000 - -

Reduction in Loans Advanced - - - -

CASH FROM FINANCING ACTIVITIES (35,349) (16,504) (18,524) (3,988)

Increase/(Deacrease) in Short Term portion of L/T borrowing (12,352) 9,336 1,495 -

Loans repaid (26,913) (16,000) (17,352) (1,321)

Increase in Finance Leases 3,916 (9,840) - -

NET INCREASE/(DECREASE) IN CASH (247,278) 20,682 (844,982) 731,252

Opening Cash Balance 400,442 153,164 173,846 (671,136)

Cash at the end of the period 153,164 173,846 (671,136) 60,117

R'000


2009 – 2011 CORPORATE PLAN: CASH FLOW

1. CASH GENERATED FROM OPERATIONS

Reconcilliation of profit before taxation to cash

generated from operations :

Profit (loss) before taxation per the income statement (59,157) (52,353) 105,225 222,924

Adjustments for non-cash flow items :

Depreciation and Amortisation 96,485 168,813 147,718 128,641

Impairment of Assets - 40,000 - -

Revaluation and Other Reserves (23,735) 20,689 18,348 -13,334

Provisions (50,194) 38,346 3,461 3,057

Transfer to Post Retirement Medical Fund 10,274 12,000 12,000 12,000

Adjustments for :

Investment income (94,303) (58,728) (3,000) (3,000)

Finance costs 13,480 20,867 10,890 6,940

Changes in Working Capital :

Decrease /(Increase) in Inventory (89,673) (89,673) (11,209) (9,864)

Decrease/ (Increase) in Accounts Receivable 29,296 (29,296) (10,417) (25,890)

Increase (Decrease) in Accounts Payable 50,086 50,086 (25,401) 25,837

Cash generated/(utilised) from/(in) operations (117,442) 120,749 247,614 347,310


STATUS ON KEY PROJECTS: DTT

Objectives of the migration to DTT are to:

i. Upgrade to digital the aged analogue television infrastructure which is more than 30 years old.

ii. Comply with ITU requirements that analogue signals will not be protected post 2015.

iii. Introduction of more television services and licencing of more broadcasters therefore stimulate the development of local content.

iv. Possible revenue generating source for Sentech with the awarding of more broadcasting licences / services.


ORIGINAL DTT PROJECT PLAN

YEAR TASK

Year 1 Preparation (mainly infrastructure)

Year 2[2007/08]

Site preparation and project pilotYear 1 planned overflow installationsSatellite distribution systems Gauteng DTTcoverage in Gauteng and Bloemfontein

Year 3[2008/09]

DTT roll-out in metropolitan areas to achieveapproximately 56% of total population terrestrialcoverage

Year 4[2009/10]

DTT roll-out in denser areas in the country toachieve approximately 78% of total populationterrestrial coverage

Year 5[2010/11]

Balance of areas to achieve approximately 92%coverage of total population terrestrial coverage(current SABC 2 coverage)

Year 6[2010/11] Analogue termination


ORIGINAL DTT PROJECT PLAN cont.

Relative year/ Population Coverage

AnnualCapital Expenditure(CAPEX)

GOVERNMENTALLOCATION(CAPEX)

PROJECTSTATUS

OPEX (Dual Illuminationcost)

GOVERNMENT ALLOCATION(Dual Illumination OPEX)

2007 Phase 1

R 95 m

R95 m

Completed

2008 Phase 2 R 120 m R120 m Completed

2009 Phase 3 (47%population

coverage)R 262.6 m

R150 m In Progress

2010 Phase 4 (63,3% populationcoverage)

R 231.4 mR160 m *(R10m) Commenced

1 April 2009 R 152.1 mR100 m

2011 Phase 5 (75,5%

population coverage)

R 250.9 m

R161 m *(R11m) R 224.8 m

R110 m

2012 Phase 6(Approx.84%population

coverage)

Not part of the original project plan.

R159 m *(R9m)

R 263.8 m

R120 m

2013 Year 7 (92% population coverage and Digital Switch Over (DSO)

Not part of the original project plan.

R 277 m

* Total R 960 m R845 m R 918 m R330 m

*Shortfall R115 m R 588 m* Year on year inflation adjustment


STATUS ON KEY PROJECTS: DTT cont.

- Despite the various challenges that Sentech experienced, the digital switch on took place on 30 October 2008, 2 days earlier than the due date as prescribed by Cabinet.

- Dual illumination commenced as at 30 October 2008 and Sentech is operating the pilot for SABC and etv.

- Sentech achieved 33% population coverage as at 31 March

2009. The planned 47% could not be achieved due to delays in finalising the DTT Spectrum Plan and policy implementation.

- Phase 4 commenced on 1 April 2009 and will continue until 31 March 2010. The objective is to achieve 63,3% population coverage by 31 March 2010. Subject to timeous finalisation of the DTT spectrum plan and policy implementation.


STATUS ON KEY PROJECTS: DTT cont.

Challenges:

- Shortfall in funding allocations and the spread of allocations as per 2009 Budget Speech will result in Sentech not achieving the Analogue Switch Off (ASO) date of 1 November 2011 as prescribed by Cabinet.

- ICASA and the industry are still working on the DTT Spectrum Plan which impacts on the rollout.

- With ASO the Sentech broadcasting signal revenue will reduce due to available spare capacity and this makes it critical for ICASA to start working towards licencing more broadcasters / services.

- Minimising frequency interference during the migration to DTT.


STATUS ON KEY PROJECTS: CONFEDERATIONS CUP 2009 AND 2010 FIFA WCS

- Role of Sentech is to provide backup satellite infrastructure as part of the Government Guarantees. DoC and Sentech concluded a contract to regulate this relationship.

- Sentech allocated R300 million in the 2008 Budget Speech. R200 million was paid over to Sentech in 2008. The outstanding R100 million is for bandwidth and operational costs during the 2009 Confederations Cup and 2010 FIFA WCS.


NATIONAL WIRELESS BROADBAND NETWORK

- Initial business plan provided for no debt funding. Based on the allocation of only R500 million National Treasury is of the view that we raise the balance from the market. (social dividend).

- World Summit on Information Society (WSIS): Building an information society – where all irrespective of age, gender, race, location and economic status has access to information. “BRIDGING THE DIGITAL DIVIDE”

- Millennium Development Goals: Use ICT for development to improve the quality of life.

- Reduction of cost of communication in South Africa through access to infrastructure and liberalisation of ICT sector.


NATIONAL WIRELESS BROADBAND NETWORK cont.

− Rollout of a national broadband wireless network: balance rural and urban areas; under-serviced and affluent areas; balance social dividends with financial sustainability.

− Sentech not to compete with private sector – provide network on a wholesale basis – catalyst to reduce the cost of communications and stimulate economic development.

− Total capital requirement in 2008 was R4.4 billion of which the fiscus requested to fund R3.125 billion over 5 years. The balance of R1,3 billion funded from the project cash flows.


NATIONAL WIRELESS BROADBAND NETWORK cont.

- If Government’s allocation is only limited to R500million, and the difference raised from the market, the funders will dictate the business model which will have implications on the following:

i. promise of lower connectivity prices will be compromised.

ii. Millennium Development Goals will be achieved at a very slow pace, as rural areas may be covered later.


DINALEDI SCHOOLS PROJECT

- In terms of Government 16 APEX of priorities (apex priority 3), Sentech was mandated to provide:

i. Connectivity of 500 Dinaledi Schools; and

ii. Connectivity of clinics, hospitals, Thusong Service Centres, Thusong Post Offices, Libraries, Heritage sites, Government and Tribal offices within the coverage area of Dinaledi Schools.

- Since 2007, Sentech submitted numerous business and funding models for the rollout of the Dinaledi schools project. As at the last business plan in 2008, Sentech required R 3,8 billion as this will be a national network.


DINALEDI SCHOOLS PROJECT cont.

- Sentech had also provided DoC with an alternative rollout model using VSAT as part of phase 1 to provide connectivity to the 500 Dinaledi Schools. These schools would later be provided with connectivity under the NWBN project. DoC however expressed a preference for rolling out a Wimax standard capable network.

- The DoC was of the view that Sentech should immediately utilise the NWBN funding allocation of R500 million. Bearing in mind that at R500 million the project is not financially sustainable and the risks of contravening good governance principles inclusive of PFMA.

- Discussions are ongoing to finalise the business and funding model.


PARTICIPATION IN UNDERSEA CABLES • There are currently 5 sub-marine cable initiatives namely:

Seacom, BahariCom/Uhurunet, EASSy, Dark Fibre Africa (DFA), West Africa sub-marine cable (Infraco).

• Sentech has been allocated R 21million to participate in the EASSy undersea sub-marine cable.

• DoC instructed Sentech not to participate in any cable but BahariCom/ Uhurunet.


SQUARE KILOMETRE ARRAY (SKA)

− The SKA - the largest and most sensitive radio telescope ever. It is likely to consist of thousands of dishes, each 10 - 15 m in diameter.

− South Africa submitted a bid in 2001 for the SKA to be located in South Africa. This project is an initiative under the Department of Science & Technology.


SQUARE KILOMETRE ARRAY (SKA) cont.

− The SKA core array will have to be located in a remote area as the relevant radio emissions are in the range of a few hundred MegaHertz, a frequency band now crowded on earth with TV and cellular telephone transmissions.

− Ideally, the core SKA array should be located in the centre of a 100 km diameter radio interference-free reserve, like a nature reserve. If built in South Africa, the core of the SKA will be in the Karoo region of the Northern Cape Province.

- South Africa and Australia are the only two countries remaining on the shortlist to site this mega telescope. A final decision on the site is expected by 2010 and construction should start in 2014.


SQUARE KILOMETRE ARRAY (SKA) cont.

- Sentech has high power transmitters within the 100km diameter radio interference-free area.

- Sentech has to vacate the required frequency band used for radio and television transmissions by replacing current high power transmitters with numerous low power transmitters in order to continue providing radio/television transmission to communities in that area.

- This has cost implications for Sentech and would require Environmental Impact Assessments (EIAs) and procurement of low power transmitters.


CONCLUSION

• Broadcasting signal distribution is profitable. • Telecom’s could be profitable, subject to funding. • Policy issues that are threatening the core.• Since the ECA is technology neutral it is important that

Shareholder reconfirm the mandates of SOEs in the ICT Sector i.e Sentech, SABC and Infraco

DD/krs/Presentation to PCC on Sentech's briefing 2009/10 budget FINAL 12 JUNE 09

36

THANK YOU

sentech limited presentation to the portfolio committee on communications on its briefing

Documents

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mandate of sentech

business of sentech

sentech teamchairperson

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