The controversial Johannesburg Broadband Network Project (JBNP), which the city council last week voted to insource, has been written off by industry observers as a "white elephant" and a project "that should never have happened".
In addition, it is not known when the network will actually go live and when Johannesburg residents will benefit from the infrastructure - if at all - while questions have been asked about the amount the city is spending to take over the network assets.
The ANC last week had to pull out all the stops at the Johannesburg City Council meeting to pass a motion for the city to buy itself out of the R3.4 billion JBNP deal and establish a municipal-owned entity (MOE), as opposition parties staged a walk-out in an attempt to break quorum.
The adoption of the motion will not only see the city buy the network assets, at a cost of R1.2 billion, but also paves the way for the establishment of an MOE that will take over the running and management of the network.
While the mayoral committee, headed by executive mayor Parks Tau, was the main driver behind the city's move to take over the network assets, analysts and industry players question the rationale behind the buyout. The move has also been criticised for potentially pitting the City of Johannesburg (COJ) as a telecommunications provider against private sector companies.
The network consists of a total of 900km of fibre, covering large parts of Johannesburg, including Orange Farm, Diepsloot, Alexandra and Soweto, which were previously underserviced areas.
Doubling up
An industry source, who does not want to be named, says the network project is a "classic case of what should not have happened", as it is a duplication of existing infrastructure.
"There is a lot of metropolitan fibre all over Joburg, so this is a total waste of public spending," he says, adding government has a poor record of rolling out and operating backbone networks. "Just look at Broadband Infraco - that hasn't exactly been a success story."
The source also questions the R1.2 billion price tag attached to the network. "It seems pretty pricey. This is most certainly not a good buy and the COJ is trying to compete with the private sector, which is not a good move."
He warns this has the potential to impinge on private sector business, as it can scare off investment, especially if local government policies are not clear about infrastructure rollout and local authorities engage in anti-competitive behaviour.
This is not a good idea. This is not what local authorities should be doing, but should rather be focusing on water and sanitation services, and not trying to be telecoms service providers.
FTTH Council Africa CEO Juanita Clark
FTTH Council Africa CEO Juanita Clark has also criticised the JBNP as being a duplication of effort and existing infrastructure, saying the COJ can ill afford to spend R1.2 billion on a fibre network.
"This is not a good idea. This is not what local authorities should be doing, but should rather be focusing on water and sanitation services, and not trying to be telecoms service providers."
Clark says a big worry surrounding this project is the lack of skills and capacity within the COJ to operate and maintain a fibre network. "I'm not sure if they understand how to do this. You need many years in the telecoms industry to be able to successfully run a project like this. I just don't know if they can."
Money-making ambitions
Analysts have been equally scathing in their view of the project and the COJ transaction. Independent telecoms analyst Spiwe Chireka calls the network a "white elephant" and says it speaks of the city's hopes of turning the network into a lucrative revenue stream.
]"What they did is inefficient duplication of infrastructure. In the very beginning of this project, it was clear there was a lot of risk involved and we knew that it would turn out like this.
"But it is not unique to Joburg, if one looks at the fibre rollout done by various municipalities. They think of these projects as potential cash cows, and this sometimes drives them into engaging in anti-competitive behaviour."
Chireka says the COJ's R1.2 billion investment is not a good way to spend ratepayers' money, as the network is essentially a high degree of infrastructure duplication, considering the amount of fibre rollout being done by companies such as Dark Fibre Africa, Cell C and Broadband Infraco.
"It seems that the high demand for fibre has given the municipality the impression that it is a money-spinner. But their wisdom is questionable." Chireka is also sceptical about whether the city has the skills and know-how to run the network.
Ovum senior analyst Richard Hurst is equally dismissive of the COJ's venture into the telecoms space and similarly calls it a white elephant. "This project was doomed from the start, if you consider the amount of bureaucracy that is normally involved in a government project.
"It's unlikely to work, especially as there is a degree of inefficiency in what they do - they can't even get the Joburg billing issue right. It's a white elephant; it doesn't get any better than that."
Hurst points out the city's move to take over the network assets is symptomatic of the council seeing the project as a money-spinner. "They want to do it all themselves and own all the pieces of the pie. They basically want full control. I think they will eventually sell it in the next two to three years."
He adds it would be difficult to quantify whether the city is buying the network at a fair price, as it is not a simple equation. "We don't know exactly what they are buying and whether this factors in the cost of civils [trenching and construction], and what population density would be served by the network."
Ulterior motive
Meanwhile, it has also emerged the city's willingness to pay R1.2 billion for the network - whether it is fair value or not - is a way to settle the arbitration process that was started by Ericsson, when the COJ decided to terminate the original contract.
The R3.4 billion JBNP deal - a contract between the COJ and CitiConnect Communications - has been in dispute since last year, when the mayoral committee decided the city should buy itself out of the contract.
CitiConnect manages an entity called BWired, which was established by the city in partnership with Ericsson South Africa when the broadband project was initiated. Ericsson won the tender for the project in 2011, for a period of 15 years. After this time, the project would be taken over by the city.
But several alleged acts of repudiation - that CitiConnect Communications had created intermediary companies to sell spare capacity on the COJ's network, as well as that it laid fibre for a second network in the city's trenches - prompted the COJ to terminate the original contract.
Neither the COJ nor Ericsson would comment on the state of the arbitration process, with Ericsson spokesperson Omasan Ogisi saying: "We will neither comment nor speculate on the termination of the build, operate and transfer agreement between the City of Johannesburg and CitiConnect Communications."
Democratic Alliance (DA) councillor Martin Louw, who has been following the JBNP closely, says city councillors have also been kept in the dark about the arbitration process. "We were told in the economic development oversight committee meeting yesterday [Thursday] that the oversight committee would be given a full presentation on the JBNP, probably in the next meeting or two. Perhaps then we could get some clarity on the arbitration issue.
It's unlikely to work, especially as there is a degree of inefficiency in what they do - they can't even get the Joburg billing issue right. It's a white elephant; it doesn't get any better than that.
Ovum senior analyst Richard Hurst
"The problem is that we don't know how much we're really in for [with the JBNP deal]. We also don't know whether the city will be having a go at BWired for breaching the contract."
Louw says it is mystifying why the city is adamant to insource the network, when it initially recognised it does not have the expertise or capacity to run it. "As the DA, we are dead set against this. We would rather see this forming part of a public-private partnership, or that a private sector company is brought on board to run it."
Question of skills
Mayoral spokesperson Phindile Chauke could not immediate say what action, if any, would be taken against BWired. "The city has sought advice from the appropriate authorities and has reserved its rights pending such advice," she says.
BWired CEO Musa Nkosi - after initially confirming he would comment on the termination of the contract and the future of his company - did not do so by the time of publication. It is not known how the company will be impacted financially, as it lists the COJ as its sole client, and it is also not known whether any of its staff would be affected.
However, it appears some of the employees will be absorbed into the proposed MOE, with Chauke denying the city is likely to face a skills dearth when it establishes the new entity.
"The city has an experienced and exceptionally skilled management team to take over the running of the entity. Existing staff in BWired will be retained and, where necessary, the city will procure capacity from the skills market and existing vendors on its panel, via normal process as appropriate."
In terms of the funding and establishment of the MOE, Chauke points out the city has gone through a "very detailed exercise with industry experts Mott Macdonald to produce a feasibility study, costing model, business plan and implementation plan for the MOE".
"The MOE will incur costs in the normal course of doing business [and] these costs will be recouped from revenues from the sale of spare capacity and the provision of services to the market.
"The R1.2 billion [for the purchase of the network assets] is budgeted within the city budget. The MOE will have its own budget as per the MFMA [Municipal Finance Management Act] and will operate as an independent entity."
The MOE will be established in accordance with the Local Government: Municipal Systems Act (Act 32 of 2000), which would allow the COJ to establish or participate and/or acquire or hold an interest in a private company.
The proposed MOE
However, it not yet clear when the MOE would be established, or when the network is expected to go live. It was initially envisaged the network would become operational on 1 July 2013, but the termination of the original contract scuppered that deadline.
Chauke explains there were several regulatory processes for the city to conclude, which have been completed as of 29 January. "There is still a pending Competition Commission process which makes a definite deadline difficult to provide. Suffice to say, the city is intent on concluding all processes to allow for a take over as expeditiously as possible."
While Chauke did not provide further details about the Competition Commission process, it seemingly refers to the city's plans to acquire interest in two private companies, with the purpose of consolidating these into a single MOE. This is outlined in a city's plans to establish the entity - a document that is in ITWeb's possession.
While critics have slammed the city's intention to solely service the council's own municipal entities - some 600 buildings in all - via the broadband network and the MOE, the COJ has denied this.
"One of the founding principles when the city tendered for the build of the network was to use the network as a lever to lower the cost of communications in Johannesburg. The city is fully committed to doing so," says Chauke.
According to the Mott Macdonald feasibility study, it will take much longer for the network and MOE to be ramped up to a stage where it can offer services to Johannesburg residents.
"Following the acquisition of the network, we anticipate that it would be possible for the COJ to offer basic connectivity services, such as dark fibre and managed Ethernet bandwidth, and COJ would assume responsibility for the existing dark fibre contract with MTN.
"However, the network would lack the service platforms needed to offer more sophisticated services such as voice calls, broadband Internet access, e-mail, video conferencing, etc, so additional investment would be required in order to support these services. While procuring service platforms could be done relatively quickly, building up an operations organisation with appropriate skills and a robust set of processes is likely to take longer."
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