South African broadband network could be shut down

The chairperson of Parliament’s Portfolio Committee on Communications, Khusela Diko, says government should consider “de-establishing” Broadband Infraco and transferring its assets to Sentech.

This follows a recent presentation by the Department of Communications and Digital Technologies regarding the creation of the State Digital Infrastructure Company (SDIC).

The concept of the SDIC dates back over three years and three communications ministers, when Stella Ndabeni-Abrahams first announced a plan to merge Broadband Infraco’s network with state-owned signal distributor Sentech.

However, in a recent Portfolio Committee meeting, the department informed parliamentarians that merging Sentech and Infraco would present serious practical challenges.

After obtaining a legal opinion from the Office State Law Advisor, the department decided that the fastest way to execute the merger was for Sentech to acquire Broadband Infraco.

However, one of the main requirements for such a deal to be approved is that each merged company must satisfy the solvency and liquidity test.

During Sentech’s due diligence on Infraco, it found that pursuing the acquisition would likely result in severe financial strain on both entities.

This could potentially lead to operational inefficiencies and jeopardise service delivery.

The department reported that as of the first quarter of the current financial year, Infraco was technically insolvent, and its liquidity ratio was less than 1.

In other words, its assets are not sufficient to cover its long-term liabilities and Broadband Infraco is not able to settle its short-term current liabilities.

“Increasing fibre network infrastructure degradation due to relatively low repairs and maintenance further threatens the ability to generate future revenue and more impairments,” the department warned.

It also warned that Infraco doesn’t have the capital to realise the growth plans necessary to generate positive cash flows from operations in the near future.

Following the presentation, the Parliamentary Portfolio Committee on Communications issued a statement expressing its reservations about the merger to establish the SDIC proceeding.

“While the committee appreciates the need to rationalise state-owned companies in the telecommunications space, the department has failed to demonstrate a bankable business case that speaks to the future profitability of the new SDIC,” Diko stated.

“It is further unclear to the committee whether the department has made any advances to consolidate all state digital infrastructure assets, such as those held by Eskom, Transnet, Sanral, and Prasa in the proposed new SDIC,” she continued.

“Failure to do so would perpetuate a fragmented, disjointed and unsustainable approach to leveraging the massive infrastructure investment the state has already made in the rollout of fibre to enhance accessibility and affordability of connectivity to the poorest and underserviced areas of our country.”

As a result, Diko said the committee has called on the department to reconsider the options for establishing the SDIC.

“Further, the department should indicate how Infraco’s financial fortunes will improve without relying on funding, which was appropriated specifically for the capital rollout of fibre across the country, as part of the SA Connect project.”

Diko said that, should conditions dictate, the department should consider the viability of “de-establishing” Broadband Infraco and transferring its assets to Sentech.

This would be part of a “visionary, forward-looking agenda to diversify Sentech’s business while positioning the company as the South African champion in the digital infrastructure space,” she said.

Diko also called on the Independent Communication Authority of South Africa to accelerate its market enquiry to assess the current state of the ICT market.

She recommended a process to ascertain whether it is still necessary to establish the SDIC, as the market has shifted considerably since the promulgation of the rationalisation policy.

“Let there be a process that will provide a better understanding of the market structure from the supply side to establish the extent at which the government still needs to intervene,” Diko said.