Broadband

ITWeb investigates: Unravelling BWired's network shenanigans

Read time 16min 10sec
An audit done in 2010 found the COJ spends R431.4 million annually on ICT services.
An audit done in 2010 found the COJ spends R431.4 million annually on ICT services.

As the City of Johannesburg (COJ) forges ahead with plans to become a telecommunications service provider and operator of its own multibillion-rand broadband fibre network, a new storm is brewing over the city's chosen entity to manage and operate the infrastructure.

While the COJ's recent move to insource the network drew fire from numerous industry players, market analysts and politicians, the latest fall-out centres on the city council's move to take over BWired - the controversial entity initially established to run the R3.4 billion Johannesburg broadband network.

This comes just weeks after the ANC leveraged its majority in the council to push through a motion for the city to buy back the fibre assets for R1.2 billion and exit a build, operate and transfer (BOT) contract with Ericsson, which fell into dispute last year. The motion also paved the way for the city to establish a municipal-owned entity (MOE) that would take over the running and management of the network.

While the city's decision to insource the network came up against staunch opposition and criticism, last month's announcement by the COJ to take control of BWired, to positon it as the proposed MOE, has caused even further controversy.

The choice of BWired is seen as particularly contentious, as the company, along with CitiConnect Communications, was found to have committed serious acts of repudiation against the BOT contract, ultimately resulting in the termination of the deal. CitiConnect Communications, which managed BWired, was established through the partnership between the COJ and Ericsson, after Ericsson successfully bid for the BOT contract in 2009.

In terms of the contract, Ericsson was allowed to cede the contract to CitiConnect Communications, with the deal set to run over a period of 15 years - three years for the design and build phase, followed by a 12-year operate phase, after which the network would have been transferred to the COJ. In terms of the contract, the cost of the build phase amounted to R1.012 billion (excluding VAT), which was covered by Ericsson. In turn, the COJ was to pay Ericsson an amount of R279 million a year for design-build, operate and transfer services.

It was envisaged the network would become operational on 1 July 2013, but the contractual dispute that developed near the completion stage of the project derailed this deadline. The dispute arose when CitiConnect Communications and BWired were found to have established intermediary companies to sell spare capacity on the COJ's network, as well as that the companies had laid fibre for a second network in the city's trenches. It is understood two new entities were established by CitiConnect Communications and BWired with the specific intent of bidding for deals to roll out similar network infrastructure in Pretoria and Pietermaritzburg.

Despite this, it is unlikely the COJ has any real intention of holding anyone accountable for the actions that led to the contract termination, and has defended the rationale behind its takeover of BWired.

Most logical

Zolani Matebese, the city's head of broadband, explains the takeover of BWired, for the purpose of appointing it as the MOE to operate the Johannesburg network, is the most logical thing to do, but adds the company will be transferred to the city without any of the senior executives or directors, in terms of the termination settlement.

"So when we receive it, what we'll get is the company sans directors, so the people who have steered the company in the past - rightly or wrongly - will exit the business. What's also important to note is that it's an operating entity now, so it does have staff, it does have processes and those will also transfer to the city," he says, adding that some 20 BWired staff members are expected to be transferred along with the company.

In effect, Matebese explains, in terminating the deal, the city has truncated the contract period, changing it from a BOT contract to a build-and-transfer agreement.

"Because of the mechanism of the settlement, the shares of CitiConnect may be transferred to the city in order for us to unwind that corporate structure. But what we want really are the assets which sit in BWired and the contracts that sit in BWired, and so transferring that to the city has the effect of creating an MOE."

This sets a very dangerous precedent that COJ is a cash cow that can be taken for a ride. The city needs to investigate this.

DA councillor Martin Louw

Matebese points out collapsing of the contract structure and the transfer of BWired to the COJ is being finalised and should be concluded in the next few weeks.

"It's really key to understand that structure, because then it allows for clarity on some people's comments as to why the city would go and do this when BWired seems to be the creator of the problems in the first place."

While Matebese says the city is taking legal advice on steps it can potentially take against any BWired and CitiConnect executives for their role in the irregular dealings of these entities, he suggests the council is unlikely to pursue this course of action with any significant vigour.

"There is fibre in the ground - there's fibre and there's duct capacity and the idea was to put in the duct capacity for expansion. We weren't happy with the way in which it was done. What are we doing about it now? Looking into what the city's options are.

"It's not as simple as one would think though, because you can't blame this individual or that individual - it's a group of people who did something that the city fundamentally disagreed with. We had contractual remedies in place and we exercised those. If you want to now ask if we're going after individual people, I'm not so sure if that's going to be successful."

Heads must roll

However, opposition politicians are demanding that heads roll, with Democratic Alliance (DA) councillor Martin Louw calling for someone to be held responsible for the acts of repudiation against the BOT contract perpetrated by BWired and CitiConnect.

"This sets a very dangerous precedent that COJ is a cash cow that can be taken for a ride. The city needs to investigate this," he says.

The COJ is unlikely to take action against any BWired or CitiConnect executives for the companies' irregular actions that scuppered a network deal with Ericsson.
The COJ is unlikely to take action against any BWired or CitiConnect executives for the companies' irregular actions that scuppered a network deal with Ericsson.

Louw points out some pertinent questions need to be asked regarding the Johannesburg broadband network project and the BOT contract. "Did either Ericsson or the COJ know who exactly they were dealing with in having agreed CitiConnect would be the performing agent? Did either entity undertake due diligence to identify whether CitiConnect had any experience in doing what they were appointed to do, and, whether they, more specifically - as might be reasonably expected in dealing with a multibillion-rand contract - had the requisite skills, experience and knowledge to perform the contract on behalf of Ericsson.

"Further, when did the COJ become aware of the irregularities, and why did it take so long to deal with these? Why did the city not appoint a director to the operating company, as is allowed - which would have enabled the COJ to have more effectively monitored and managed the BOT agreement? Notwithstanding this, why did the city not request an audit the moment we determined non-performance by the subcontractor?"

But Louw also alleges more sinister motives were at play when requests for proposals for the BOT project were issued in 2006, under the former city council administration headed by then executive mayor Amos Masondo. Louw states Ericsson overpaid for the build phase of the contract, and various COJ councillors, two deputy ministers and several BWired and CitiConnect executives benefitted unduly from the deal.

His claims are echoed by fellow DA councillor Andrew Stewart, who says it is common industry knowledge that Ericsson was overcharged for building the network infrastructure, which consists of a total of 900km of fibre, covering large parts of Johannesburg, including Orange Farm, Diepsloot, Alexandra and Soweto.

He says various independent industry experts have valued the networked at about R300 000, a quarter of the R1.2 billion the COJ will pay back to the company to terminate the contract. Stewart also maintains the R279 million a year the COJ would have paid Ericsson for design-build, operate and transfer services for the duration of the deal is also highly inflated, and should not have exceeded R90 million.

While Stewart and Louw both concede they have been unable to get their hands on hard evidence to substantiate these allegations, Louw is adamant there is enough prima facie evidence for further investigation. "The DA will request the public protector to look into this whole deal. It's obvious the city would like to sweep this all under the carpet and quietly terminate the contract so that none of this comes out."

Ericsson has repeatedly refused to comment, saying it will neither comment nor speculate on the termination of the BOT agreement between the COJ and CitiConnect. BWired CEO Musa Nkosi did not respond to a request for comment.

Reasonable costs

Meanwhile, Matebese says there is nothing untoward about the cost of the network. "There is a lot of talk about the stuff in the ground and whether it's worth R1.2 billion. The possible discrepancy in value, and I don't even think that this is valid, is that there have been industry experts who are saying we wouldn't be paying what the city is paying for the network. But that's because 30% of the cost is in the civils - so you put the ducting in the ground and it's good for 25 to 30 years and you blow your fibres through and you commercialise and light the fibre.

"What they may be talking about is the fact that - and one really has any visibility into this - at a point of presence is my switching equipment, the Junipers, Ciscos and Nokia Siemens [devices]. A lot of people discount the value of those switches and network management systems, but you need that to run the network.

"So, if you're talking about just the stuff in the ground, there may be an argument it is not at the value that we paid for it. Again, I don't agree. This goes back to the tender. When we tendered, all of the suspects who talk about value gave us a proposal and all of those proposals were more expensive than the Ericsson proposal. So to come back now - years later - saying 'well, now we're not sure about the value', is very disingenuous."

We had contractual remedies in place and we exercised those. If you want to now ask if we're going after individual people, I'm not so sure if that's going to be successful.

COJ head of broadband Zolani Matebese

Eleven bidders were short-listed for the tender after it was issued in 2006, with four bidders - MTN, Neology, Vodacom and Altech - officially withdrawing from the process, "for various reasons", according to COJ documents. Of the remaining seven, only four submitted proposals, with Ericsson trumping Dimension Data, Goal Technology Solutions and Transtel.

Matebese argues it is key to note, when considering the settlement costs the COJ is going to incur, that to date the city has paid no money for the project. "So this has been off our balance sheet, we haven't put any money into the ground, we had planned on using the model where we ring-fence certain services, transition those onto the network and those in effect would pay for the network costs and the implementation costs."

Beyond the fibre

Delving into the thinking behind the COJ's planned foray into telecoms service provision, Matebese points out the telecommunications landscape has shifted significantly, and that value no long resides solely in network assets.

"We're starting to see that, and it's becoming a lot more of an almost utility type of business than what it previously was, which was something that generated super profits for a few players in the market. It's now more about the over-the-top players, the people who produce content and value."

Apart from the significant socio-economic benefits the network is envisaged to bring to large segments of the city's population living in underserviced areas, by providing access to broadband, Matebese says the network will allow the city to meet certain efficiency and financial objectives.

"We have some project objectives and the idea was to meet them. Firstly, to reduce our own ICT costs, because we recognised that we were paying a significant amount of money, more than we should really be paying [to service providers]. And any reduction in our ICT costs can then go back into the fiscus and do other things and deal with other competing priorities, rather than putting money into operators' pockets.

"The second thing was to say that we have to have a broadband platform if we want to be a smart city. We just need broadband bandwidth and not our previous definition of broadband, which has now changed. It's significant bandwidth capacity to run things such as SAP, to run things such as cloud platforms - if you can't do that, you're falling behind. And we want to deliver the best kind of services that we are able to deliver to the ratepayers; that's why we're here.

"Publically, there is a certain posture than is being adopted, but privately I think everyone realises this is one of the most logical things to do - to unwind the contract, to take control of the entity and to use it to deliver your platform going forward."

While Matebese notes the COJ is a "telecoms consumer of note", and pays a significant amount to different operators for access to bandwidth, an audit of the city's telecoms assets paints an alarming picture of wasteful spending and ineffectual management of these assets, costing ratepayers millions of rands a year.

In 2010, an independent telecoms consultancy was commissioned by BWired to conduct a telecoms services review for the COJ, and an executive summary of the findings is in ITWeb's possession. Speaking on condition that neither he, nor his company would be named, the head of the consultancy reveals that signs of problems between BWired and the COJ emerged during the study.

COJ's ICT spend

The consultant says he was engaged to carry out the audit in two phases - with the first being the data collection phase and the second an analysis phase for the refresh of infrastructure. The company was given three weeks to conclude the gathering of information - mainly to determine what the COJ is spending on ICT services.

The phase one findings were presented to the COJ on 12March 2010, and the consultant says his company was due to begin phase two, when its services were abruptly terminated. "Two days after the presentation, we were told that we are no longer involved," he says, adding BWired never paid for the audit and owes his company some R300 000. "They strung me along for two years," he adds.

As part of the audit, the consultancy analysed all Telkom accounts to identify what services (rental and consumption) are used for telephony purposes. Its analysis indicated the rental amount consists of 2 559 analogue lines, 227 basic rate lines (two channels each), 74 primary rate lines (30 channels each), and various other services that include facilities on lines (call forwarding, international call barring, hunting facilities, etc) and PABX equipment rental.

The audit found the total rental for lines, facilities and equipment amounts to R11.4 million a year, while the total consumption (call cost) comes to R32.4 million a year.

An analysis of inter-branch communication revealed the COJ has 5 233 Telkom lines connected to its various sites. These range from one analogue line to multiple primary rate lines. The analysis was contained to sites with PABXs.

"During the investigation, we found the value of calls between sites is mainly contained within the entities and also mainly between the entity branch sites and entity head office. Calls between the entity branch sites were lower. When averaging the calls between sites, we found 9% of the total consumption cost is allocated to inter-branch calls. This equates to R2.9 million a year.

A study of the COJ's cellular communications found the city is spending R35 million per year, with several service providers. This spend is mainly on cellphones allocated to designated COJ employees.

The audit concluded the COJ's total annual ICT expenditure - as determined in June 2010 - is R431.4 million. Of this figure, the audit found expenditure of R306.5 million could have been transitioned in phases to the city's broadband network. However, since the network did not become operational in 2013, as initially planned, ratepayers have been left to carry the costs.

The COJ's total ICT expenditure, as per an independent audit done in June 2010:

EXPENDITURE

AMOUNT/MONTH

AMOUNT/YEAR

Telkom voice

R3 657 260.88

R43 887 130.60

Neotel voice

R155 345.00

R1 864 140.00

LCR

R2 215 802.00

R26 589 624.00

Cellular handsets

R2 950 382.00

R35 404 584.00

PABX and ancillary maintenance

R644 225.50

R7 760 706.00

Networks and connectivity

R23 296 432.53

R279 557 190.33

Software

R2 651 620.37

R32 295 823.48

Document solutions

R185 875.72

R2 230 508.64

Other misc NWK support

R61 810.47

R549 581.66

Cabling

R48 187.33

R578 248.00

UPS/generators

R856.25

R10 275.00

Backup storage and DR

R34 494.50

R413 934.00

Hardware not included

Total

R35 902 292.56

R431 141 745.71

ICT expenditure that could have been transitioned in phases to the COJ's broadband network, as per an independent audit done in June 2010:

EXPENDITURE

AMOUNT/YEAR

Telkom voice

R43 887 130.60

Neotel voice

R1 864 140.00

LCR

R26 589 624.00

PABX and ancillary maintenance

R7 760 706.00

Networks and connectivity

R224 652 272.01

Other misc NWK support

R549 581.66

Cabling

R578 248.00

UPS/Generators

R10 275.00

Backup storage and DR

R413 934.00

Total

R306 581 911.27

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