The government’s ambitious new broadband company, Infraco, may be still born with internal dissent and regulatory uncertainty currently blocking progress on the deal to create it.
Andrew Mthembu, the lead consultant on the project, appears to be on his way out, after Director General of Public Enterprises, Portia Molefe, declined to renew his contract beyond January.
Meanwhile, tardiness at the department of communications, disagreement with the private shareholder, the Indian conglomerate, Tata, and a lack of clarity over the licensing requirements for the company are making it impossible to finalise the transactions that would create Infraco, according to people familiar with recent discussions about its future.
Mthembu could not be reached for comment, but sources close to the project told the Mail & Guardian that Molefe had decided to terminate his involvement with the company, and suggested that he had clashed with Tata over both pricing — which the government wants kept to a minimum — and the details of a proposed undersea cable.
Public Enterprises spokesperson Gaynor Kast flatly denied those claims. “The allegation that Andrew Mthembu’s contract will not be renewed is completely unfounded,” she insisted, saying “everything is on track”.
Mthembu, previously managing director at Vodacom, was hired by Public Enterprises Minister Alec Erwin a year ago, and he has been the key architect of Infraco. He devised the arrangement to transfer Eskom’s extensive fibre-optic network to a new company, in which the government would hold 74%. The remaining 26% was to be held by VSNL, a subsidiary of Tata, which owns a similar stake in the second network operator, Neotel.
Finance Minister Trevor Manuel in his October medium-term budget policy statement announced an initial allocation of R647-million in government funding for the company, which, officials say, was earmarked for the acquisition of Eskom assets by Infraco.
The idea was that Infraco would sell the capacity available on this network to, Neotel, enabling it to bypass Telkom for a substantial portion of its local bandwidth needs without raising fresh capital.
It was originally envisaged that Neotel would buy the Eskom assets outright, but with other Neotel shareholders short of cash, the Infraco plan enables Tata to get same effective share of the Eskom backbone through a separate structure. The government, meanwhile, gets to keep firm control of Infraco’s pricing. That, it seems, created a sharp — and predictable conflict between Tata and Mthembu’s team, which has not been resolved.
The second — and more controversial — element of the plan was for Infraco to lay a new undersea cable, bypassing the SAT 3 cable that is currently controlled by Telkom. The intention was to boost dramatically international bandwidth and bring down the ruinously high access costs that international investors and local businesses have repeatedly complained are a constraint on growth.
The new cable has always been a sticking point with the department of communications, which sees Infraco as a threat to its own plans. For three years communications officials have been punting Sentech, the state owned signal distribution company, as a significant player in the local bandwidth market and they have recently been pinning their hopes on the new East African submarine cable (EASsy) to help break Telkom’s stranglehold on international traffic.
Sources sympathetic to Mthembu say Tata is now trying to frustrate plans for a third cable because it has already cut deals to gain access to the existing connection and Neotel can profitably exploit those deals without interference from a government shareholder, which will insist on low prices and tight margins.
Tata had not responded to requests for comment at press time.
And, despite a fiat from Erwin to “get it done”, the weakness of the regulator, Icasa, and the lack of enthusiasm from the department of communications means neither Tata nor the government knows just what the rules governing the new operator would be.
Persistent complaints about the local bandwidth market were highlighted again this week when Reuters CEO Tom Glocer told Business Day that Telkom’s high prices and “flaky” quality were preventing his company from expanding its local presence.
President Thabo Mbeki has repeatedly voiced similar concerns, and Erwin has staked considerable personal prestige on Infraco as a solution. He seems to have convinced the Cabinet. After he presented his plans to the presidency his critics at communications fell in behind the scheme.
Director General in the department of communications Lyndall Shope Mafole told the M&G through a spokesperson that Infraco was a government project, not a public enterprises project, and there was no dispute over it.
In an interview last November Erwin told the M&G that the Infraco cable would not only open up the market, but would underpin South Africa’s bid for the giant Square Kilometer Array telescope at Sutherland (which needs considerabe dedicated bandwidth) and help to service the demands of the 2010 World Cup.
He said he believes it will play a crucial role in unlocking economic growth.
Erwin is unlikely to change his mind, but the complexity of the unresolved issues will mean he must muster considerably more support to drive the plan through.
The National Treasury has made space in the budget for Infraco, but in the clearest sign that the project is in difficulty, crucial documentation that would unlock its formal approval for the deal, and enable it to release the cash, has yet to leave Molefe’s office.