Response to Sunday Times article - "Poor signals coming from Sentech"

On 13 September 2009, Sunday Times published an article titled “Poor signals coming from Sentech”.  The article was co-authored by Rob Rose and Stephan Hofstatter and was an analysis of the 2009/10 Annual Report. 

The two writers had approached Sentech with the questions highlighted in the subsequent paragraphs which Sentech responded to in order to assist the writers in fashioning the article.  The manner in which the article was relayed was not balanced.

In light of the above Sentech deems it necessary to furnish our stakeholders with the original questions raised by Sunday Times as well as Sentech’s responses to those questions. 
 

SUNDAY TIMES / SENTECH QUESTIONS AND ANSWERS

SENTECH’S VARIOUS NON COMPLIANCE WITH ACCOUNTING RULES
Sunday Times Question (ST): On the RentWorks deal, the upshot was that R8,2m is considered "irregular expenditure". How was this deal done without treasury approval, and who was responsible for doing this? Will there be any consequences, and how seriously does Sentech treat this issue?
Sentech Response (S): Expert opinion was that the conversion of the RentWorks operating leases to finance leases did not require PFMA approval.  The auditor however held a different view and Sentech has since applied to National Treasury for condonation.  Refer to page 81 of the Annual Report (AR) which deals comprehensively with the matter. The AR was approved by the Shareholder at the AGM held recently.

ST: Why is there a R13m VAT liability which has not been paid on government grants? SARS believes that Sentech should have paid it, but Sentech apparently thinks not. How is that a state-owned company thinks it is above paying tax?
S: The VAT issue was discussed with SARS and Sentech will as far as it is possible comply with the applicable legislation.

FINANCIAL RESULTS
ST: How is it that the operating loss worsened from R21m to R83m on revenues of R766m, with a negative return-on-equity of 18,6%? Revenue was lower than budget, while the operating loss was higher. So who bears accountability for this? In some other companies, the CEO would have resigned, rather than present these sorts of results.
S: The operations to be discontinued account for the major part of the operating loss which will stem the bleeding in the following year. We further had an impairment of R46m for assets impaired related to the discontinued operations. These expenses are non recurring.

ST: Does Sentech include the ring-fenced cash from government grants in its revenue figure?
S: The grants received to date are capital grants related to the creation of assets. They are only included in revenue when the assets are in operation and only to the extent of the depreciation expense against the grant funded assets.

ST: The amount of bad debts of R8,6m written-off have climbed fourfold. And uncollectable debts of R9,6m has also increased. What does this mean? Are Sentech’s customers just not paying, or refusing to pay? Or are your systems failing?
S: We embarked on an exercise to clean up the debtors’ book. Previously these debtors were handed over for collection to agencies on a no risk basis. The efforts are still in progress to collect from these debtors by the agencies and the results are reflective of the economic times which can be seen in many industries.

ST:  Both the internal and external audit are done by professional audit firms. Why has Sentech avoided having the Auditor-General conduct an audit into its financials, opting instead to hire a private firm? Does this mean Sentech is worried about the greater scrutiny the AG’s office would bring to bear?
S:  The Auditor General issued Government Gazette No. 31057 in terms of which he has opted in terms of section 25 (1) (a) of the Public Audit Act not to perform the audits of certain SOE including Sentech, unless advised otherwise prior to the start of the SOE’s financial year. Each year the Auditor-General is approached to establish if he wishes to conduct the audit, and if he does not, The Minister at the AGM then appoints private auditors in consultation with and approval of the Auditor-General.

ST:  Why was the balance sheet, income statement and cash flow “restated” from the previous year? What was changed? Also, who got them wrong the year before, and what were the consequences for those individuals?
S:  Prior year adjustments are explained in note 28 on Page 135 of the Annual report.

CORPORATE GOVERNANCE
ST: Correspondence we have seen from the CWU’s interaction with Sentech on restructuring indicates serious questions about governance, specifically cronyism and nepotism. The CWU talks about a culture of "job-creation for pals and family members of the CEO" at Sentech. This, along with the fact she is running the company at a loss without a break-even strategy is partly why they want the CEO to resign. What is your response? How many family members/friends of the CEO currently work in senior positions at Sentech?
S: No relatives of the CEO work at Sentech. No jobs have been created specifically for friends and family members of the CEO. Any friendships she has with staff arise from the working relationship and are managed appropriately. The Board is satisfied that all appointments at Sentech have been conducted in terms of the company’s human resource policies. It is hardly fair to hold the CEO accountable for losses incurred in a State Owned Entity that is prohibited by the PFMA from raising its own capital and therefore dependent on government grants to fund massive capital expenditure projects such as Digital Terrestrial Television (DTT) migration, 2010 World Cup and rolling out the National Wholesale Broadband Network (NWBN).

ST:  In your view, what were the findings of the Deloitte report when it came to corporate governance and general management? Do you view the findings as an indictment of the organisation?
S:  The findings of the Deloitte Report were not an indictment of the organisation.  The report contained a few minor recommendations which the Company agreed to implement and the Minister was advised accordingly.

ST:  Would Sentech be willing to release that Deloitte report, in the interests of transparency?
S:  In view of the fact that it was commissioned by DoC, it would have to be released by them.

ST:  Why did Sentech spend R8m on consulting fees last year, nearly double the R4,5m of the year before? Is this because it just doesn't have the skills to keep operating like any other company?
S: Sentech did utilize more consulting firms during the year under review as it required specialized skills. However, these consultants worked closely with Sentech’s staff and transferred knowledge and skills. DTT tariffs and rollout is one area of note.

ST:  How is that a former board member, Mr Mlamli Booi (who quit in 2007), is now being paid as a "independent advisor" to Sentech? When and where was this appointment advertised?
S:  Mr Mlamli Booi is a consultant and in that capacity he felt that his directorship at Sentech prejudiced his consulting business and he thus tendered his resignation.  He had been considered an extremely valuable member of the Board and it was decided to approach him to serve as an outside advisor to the Technology Committee of which he has been a useful member.  He did not believe that serving on the Technology Committee prejudiced his business.  It was not necessary to advertise the position as the Board is empowered to appoint outside persons to Board committees.

ST:  Why did Len Konar step down from the audit committee due to a potential conflict of interest? What was this potential conflict of interest?
S: Dr. Len Konar did not step down from the audit committee.  At the meeting of 02 December 2008, Dr Konar declared to the Board that he is a tenant of the internal auditors (PKF Inc.) and further that he was to have a common shareholding in a company with the incoming partner in charge of internal audit at PKF Inc.  In order to avoid any suggestion or perception of a conflict of interest, he resigned as Chairperson of the Audit Committee.
Based on advise, the Board accepted his resignation as Chairperson of the Committee but agreed that he could continue serving as a member of the Audit Committee due to his vast and invaluable experience which is of benefit to the Committee.

ST:  We know of expenditure that doesn't seem to be justifiable, such as helicopter trips for the CEO (in years gone by), and a continued employment of a bodyguard for the CEO. This seems like a waste of taxpayers’ money. What is the reason for this?
S:  The entire question of a driver/security for the CEO was fully dealt with by the Board and approved and the service was outsourced.  After a year it was agreed that the service should be continued on a permanent basis and it was decided to employ the person who had provided this service in the past.   This was not considered a waste of expenditure by the Board then or now.  The CEO has also never been on a helicopter ride at the expense of Sentech.

DEPARTMENT OF COMMUNICATIONS
ST:  The Department of Communications has been at Sentech's offices. We understand it is to examine complaints that it is badly run, and probe the entire company's raison d'etre. The annual report says this probe has been to discuss its turnaround strategy. But what is the reason for this?
S: We refer you to the Department’s recent statement on the matter (see below). For clarification, the Auditor General is not conducting a forensic audit at Sentech.

ST: Has Sentech been advised of the findings of this task team?
S:  No.

REMUNERATION
ST:  In a company with such poor performance, where many of the targets weren’t achieved and where losses deepened, how can it be right that the CEO and other directors gets such a handsome increase, with Dr Mokone-Matabane salary increasing 10,6% to R2,01m?
S:  Senior management and executive directors receive annual increases based on their performance. In 2008, the CEO received 10% increase based on her performance and that of the Company against targets as agreed to with Government in terms of the Shareholders Compact. The performance of the Company against those strategic objectives as outlined in the Shareholders Compact is contained on pages 18 and 19.

CUSTOMERS
ST:  How are relations with e.tv? In their court case with Icasa, they included a lot of detail about Sentech’s tariffs, and it seems a large customer isn’t that pleased with Sentech?
S:  Sentech strives to maintain its relationship with e.tv as a valued customer, both now and going forward

ST:  We have heard that besides the Icasa case, e.tv is also suing Sentech for non-performance separately. Is this true? Is there another court case between e.tv and Sentech separately?
S:  Sentech is not aware of any pending e.tv court case against the Company for non-performance.

DEBTS AND GOING CONCERN STATUS
ST:  Sentech appears to be facing a crippling debt load, with total liabilities increasing by R248m last year. Ultimately, debts grew faster than assets (up R170m, and only because of cash it got from government loans). Does this concern Sentech, and how does it plan to address this?
S:  Government grants are treated as liabilities until assets creation. We are in constant discussions with the shareholder to capitalize the company as certain liabilites will continue to grow above inflation e.g post retirement medical aid

ST:  What seems to be the real problem is that if you exclude the “ring-fenced” cash of R785m (for the DTT project, World Cup, etc) which largely came through government grants from its assets, then your total assets comes to only R1,1bn. Now, this is less than your liabilities of R1,4m. But what should be of more concern is that R380m is debts payable within one year (R322m is owed to “trade creditors”, R19m is owed to SARS and R38m to repay your banks). Yet, if you exclude the “ring-fenced cash”, Sentech only really has R348m to pay this, suggesting it couldn’t pay its debts, and would be pretty close to insolvent. Is this a concern to Sentech? Because, without government support, the company would have collapsed by now
S:  See Directors’ Going Concern statement on Page 82 of the Annual Report.

NON-PERFORMING BUSINESS
ST:  There is an interesting admission that the decision to exit all the "non-performing" telecoms products - MyWireless, BizNet and VAS - was taken at the request of the shareholder, resulting in a R45m impairment. If government asked you to do this, why is Sentech still looking for funding for the broadband wireless network.
S:  The termination was of the retail broadband services. See Pages 59, 81, 85 109 and 122 of the Annual Report. The future focus of Sentech is on providing a National Wholesale Broadband Network (NWBN).

ST:  Have customers of these "non-performing products", like Standard Bank etc, been informed that they will now probably have to move to Telkom? Our information says they haven't.
S: Appropriate notifications have been sent to all customers who will be affected. The notification is also posted on the Website and the Call Centre is handling customers’ queries

ST:  With all the restructuring, our understanding is that the Department of Communications asked Sentech for its new strategy in the last month, yet you were unable to provide it. Why is this? 
S:  We are not aware of this request to submit in the last month.  However as a matter of course, as required in terms of PFMA, Sentech submitted its 2009 – 2012 Corporate Plan to the Department of Communications and National Treasury at the end of February 2009. The Corporate Plan fully sets out the Company’s strategy.

INFRASTRUCTURE MAINTENANCE
ST:  There are concerns in the telecoms industry that Sentech has not invested adequately in maintenance of infrastructure. What is your position on this? Does the state of Sentech’s infrastructure pose any risk to its operations? Why not use unused funds from the R500m Treasury allocation for broadband for this critical purpose?
S:  The performance data on pages 22 – 25 of the Annual Report speak to the effective maintenance of the network. The allocation of R500 million for the National Wholesale Broadband Network (NWBN) was a Parliamentary appropriation and Sentech is not at liberty to reallocate the funds, unless directed by National Treasury. If further financial commitment for the (NWBN) project is not forthcoming, we would motivate for the reallocation of these funds to the Digital Terrestrial Television (DTT) project.