SA's second network operator Neotel has yet to finalise paying a once-off licence fee that dates back to the 2009/10 financial year, raising concerns about its cash flow and ability to continue operating.
However, Neotel argues there was no clarity about how much it should pay, and when a fee, if any, was due. Its confusion stems from a change to the regulations in 2009, which abolished the fixed licence fee.
Neotel was initially meant to pay a R100 million once-off licence fee to the Independent Communications Authority of SA (ICASA), over a period of 10 years.
However, the fixed fee was abolished in 2009 and Neotel and ICASA reached an out-of-court settlement last October, and Neotel agreed to pay R30 million, which was due at the end of April.
However, according to the operator's compliance report, published by the regulator earlier this month, Neotel missed the deadline and ICASA's licensing and compliance division recommended the authority apply for a “writ of execution”.
Subsequently, the operator has paid R20 million of the agreed amount, but will only settle the balance on 4 September, four months after the entire amount was due.
Neotel's failure to pay the fee when it was due raises doubts about its ability to operate, as licence fees are fundamental for companies that want to provide telecommunications services. If an operator fails to pay its licence fee, ICASA has the power to revoke its licence, preventing it from operating.
Settlement
Historically, there were two types of licence fees. The first was a market entry fee of R100 million that Neotel and the mobile network operators were meant to pay over the period of a decade.
In 2009, new regulations around licence fees were introduced, which abolished the once-off fee. The regulations also amended the yearly fee to 1.5% of gross profit.
Telcos that entered the market after the regulations were changed did not have to pay the once-off fee.
Neotel argues the new regulations created confusion, as it was on the verge of starting to pay the R100 million fee. As a result, according to ICASA's 2010 annual report, Neotel lodged an application to review the R100 million licence fee.
Last year, Neotel agreed to pay R30 million in an out-of-court settlement, which was due by the end of April. Neotel explains it believed that a fee was due for the period between 2005 and 2009, but it had no idea how to work out what was due.
However, by the time Neotel's compliance report was sanctioned for publication earlier this month, it had not done so
The report says Neotel made a “verbal undertaking” to make a part payment, with the balance to be paid over in terms of a payment plan. It says Neotel did not stick to its promise and recommended the authority apply for a “writ of execution”.
Neotel says the reference to a writ of execution is out of date, because it has started paying. It explains the court agreement allowed Neotel to pay after April, but with interest. Because the process took so long and involved a court, the operator was “uncertain when the fee, if at all, would be payable”.
Subsequently, Neotel and ICASA agreed to a payment plan, letting the operator off the hook. ICASA spokesman Paseka Maleka says Neotel has so far made two payments, amounting to R20 million. The outstanding balance is R10 million, he says.
Maleka says the operator provided a payment plan, which the council approved. He says although operators run the risk of losing their licence if they do not pay the fee, “at the end of the day, people must get the service”.
ICASA cannot just take away licences as there is a process that must be followed, explains Maleka. However, he explains that a licence fee gives a telco the ability to operate. “Everyone pays.”
Neotel's chief corporate services officer, Tracy Cohen, says payments will be wrapped up in September. “The disparity in the report emanates from the apparent time lapse between the report's drafting, its publication and the commencement of the licence fee payment.”
Worrying
Steven Ambrose, MD of Strategy Worx, says Neotel's failure to pay its licence, regardless of whether it has made a partial payment, raises doubts about its cash flow situation and whether it can continue to operate. He says a licence fee is a fundamental enabler to Neotel's entire business plan.
According to its compliance report, Neotel made a R1.86 million gross loss for the year to March 2010. As it provided information around the loss, the company complied with the annual licence fee, which is 1.5% of gross profit.
CEO and MD Sunil Joshi has said the company would be profitable at an earnings before interest, depreciation, tax and amortisation line this financial year. That means Neotel will be profitable on a cash basis by next March.
The operator also has plans to get to the next two levels of profitability, and eventually make money at a net level, although it has not disclosed timelines for this target.
Ambrose questions whether Neotel can manage its operations if it cannot pay its licence fee. “It makes no sense that they can get away with this type of maladministration.”
ICASA should be firm and clamp down on entities that do not pay their fees, says Ambrose. He points out that the regulator has previously stated it needs more funding to operate effectively, but has let the Neotel matter drag on.
ICASA's corporate strategy for the period between 2011 and 2014 indicates that the body needs more funding, otherwise it is unlikely to achieve any of its future plans. The current shortfall is about 36% of its budget.
Ambrose argues ICASA's failure to make Neotel pay “shows its sheer lack of teeth”.
The second national operator received its licence in December 2005, 44 months behind government's initial schedule. Neotel finally launched almost a year later, in September 2006, and set itself the target of taking 15% of Telkom's market share.
So far, the company has failed to live up to expectations and has about 50 000 consumer customers, and about 100 corporate clients, a far cry from the 15% market share it aimed to achieve within five years. Telkom has around four million fixed-lines in SA, and dominates the corporate space.
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