Broadband Infraco looks to turn a profit

Simnikiwe Mzekandaba
By Simnikiwe Mzekandaba, IT in government editor
Johannesburg, 28 May 2019
Broadband Infraco is working towards a business model that will eventually make it profitable, financially viable and sustainable.
Broadband Infraco is working towards a business model that will eventually make it profitable, financially viable and sustainable.

While it has often been branded as a cash-strapped entity with no clear future, Broadband Infraco is looking to turn around its financial state through a mixture of traditional business and an enhanced service offering in the digital revolution era.

So said CEO Andrew Matseke, explaining the broadband company is not in the queue with other state-owned companies to ask government for a bailout. Rather, it is focusing on a business model that will eventually make it profitable, financially viable and sustainable.

Matseke, who took over from Puleng Kwele in 2017, says Infraco’s operating profit, or earnings before interest, tax, depreciation and amortisation, is positive. However, the company makes a net loss when other elements of the income statement are added.

Detailing the organisation’s financial standing, he points out Infraco has generated net cash from operations for two financial years in a row. This, he says, enables it to continue operating without having to ask government for any financial assistance.

This is its holding position, notes Matseke. “The real sellable future that we can convey to the market to generate excitement is when we drive towards full profitability, but that requires investment. We are busy with the two shareholders with the strengthening of the balance sheet, so that we can borrow on our own from capital markets to expand our infrastructure.

“We haven't had an infrastructure cash injection for about five years, but it’s not going to come from government. The strategy is to strengthen the balance sheet and then when the balance sheet looks healthy, financial institutions can be approached to say we need funding. The funding we're looking for is for infrastructure investment, not operating expenditure. We already cover our operating expenditure because we generate net cash from operations.”

Profit-driven aim

As a schedule two company, in terms of the Public Finance Management Act, Broadband Infraco has a profit mandate.

It was awarded an individual electronic communications network services licence in October 2009, allowing it to sell high-capacity long-distance transmission services to licensed fixed and mobile network operators, Internet service providers and other value-added network service providers.

Infraco is the only state-owned company that was created by an Act of Parliament solely for the purpose of rolling out strategic broadband infrastructure, with a focus on underserviced areas. The company reports its activities and performance to the Department of Telecommunications and Postal Services (DTPS) and the Industrial Development Corporation, in their capacity as its shareholders.

However, financial losses, struggles to fulfil its broadband access mandate and murmurs of a potential buyout and partnership with Telkom hinted at a future sans the state broadband entity.

Matseke is of the view his company is still best placed to improve broadband access and affordability in SA. “Government has a view of using this entity to address connectivity and under-serviced areas. So, we have a dual role, of making the traditional market more competitive, but also addressing connectivity to under-serviced areas.”

Broadband Infraco CEO Andrew Matseke.
Broadband Infraco CEO Andrew Matseke.

SA Connect disconnect

Improving access and connectivity is what made Broadband Infraco’s involvement with SA Connect a natural fit, according to Matseke.

SA Connect is government's ambitious project, which aims to deliver widespread broadband access to 90% of the country's population by 2020, and 100% by 2030.

However, progress with the big broadband push has been limited and characterised by various uncoordinated initiatives.

The DTPS, which is handling the project, devised a new model in collaboration with the State IT Agency (SITA) and Broadband Infraco to roll out the project, following delays arising from the original procurement model.

Broadband Infraco has taken the lead in infrastructure deployment, while SITA provides the connectivity.

Matseke explains: “If you look at all the operators, ourselves included, we all have in our licences a universal service obligation, but I think if you travel to the rural parts of South Africa, you will see that there is a gap between the policy parts as it relates to under-serviced areas and the actual deliverable of broadband connectivity in those areas.

“The mobile network operators have tried in terms of mobile connectivity and mobile data, but whether it's in rural areas or in urban areas, we know that price-wise it is not cheap. This, therefore, creates a challenge of access versus affordability.”

The CEO goes on to say the first step of the SA Connect policy is to provide connectivity to government facilities, including all schools, health facilities in the country and those who live in under-serviced areas.

“Once you've created a broadband connection into a school or a clinic in a rural area, you've created infrastructure. Its presence in that rural area gives the possibility to extend beyond the school or the clinic. We are starting off at all these facilities with a minimum connection of 10Mbps.

“The service providers that BI has partnered with do the last mile connection, from its points of presence to the schools and the clinics.”

When asked about the slow pace of getting SA Connect off the ground, Matseke points out it’s not fully dependent on Infraco to drive complete implementation of the project.

“The model of SA Connect is that government pays a monthly opex for that 10Mbps connection and therefore that is an allocation the DTPS gets from National Treasury. That is the current constraint in terms of how many sites we can roll out.

“The plan for phase one (we are only implementing phase one at the moment), is for it to be completed within the next three years.

“SA Connect is special because it's about changing the lives of South Africans who, without that type of intervention, run the risk of being left behind the digital divide that we've been talking about for the last 20-plus years.

“I think when fully implemented, SA Connect should make a huge dent in the disadvantages rural areas currently have. It may not necessarily get us there 100% but it will make a difference.”

Competitive partnership

Elaborating on the future prospects of the organisation in light of the impending union with signal distributor Sentech, Matseke says it will likely take two financial years before that merger is complete.

To address duplication of infrastructure and mandates within its entities, the DTPS set out on a restructuring exercise for its entities.

Six state-owned companies report to the DTPS: Broadband Infraco, Sentech, SITA, Universal Service and Access Agency of SA, National Electronic Media Institute of SA and the SA Post Office.

In terms of the restructuring, Sentech and Broadband Infraco will merge to form a state-owned ICT infrastructure company, while SITA's functions will be remodelled to establish a state-owned IT company.

“The measure of the two entities is, from a business point of view, currently based on growth. The intention is growth. The combination of the two has the potential for even better growth than when they operate as two separate entities.

“So, from that point of view, I see the risk of retrenchment as being very low, primarily because the intention is growth rather than rationalisation,” he concludes.