Annual ReportFY 2009/10

Portfolio Committee on Public Enterprises

16 November 2010

Table of ContentsChairman & Chief Executive Officer’s report

National & international business development

Governance reportNational & international business development

Board, compliance & enterprise risk management

performance against Shareholders’ Compact

Annual Financial Statements

External auditors report

Operating results, financial performance

ash Flow Statement and Funding

Priorities for FY 2010/11

Market Update

Summary & conclusionSlide 2

Chairman & Chief Executive Officer’s Report

Slide 3

Introduction to the Annual Report

• After twenty-eight months of operations, Broadband Infraco has made significant progress in both key national and international elements of the business

• Some progress in the legal & regulatory environment – ECNS Licence awarded

• The company has adopted a wholesale, carrier-of-carriers business model to serve other licensed or exempt operators, consistent with its mandate

• Broadband Infraco has completed the development of its product and service offerings and will be ready to enter the market once a number of capital projects to ensure carrier grade services and open access have been completed.

Slide 4

• Service pricing frameworks have been developed based on market benchmarking

• Business development, marketing & sales pipeline activities advanced rapidly

• Of importance is that the wholesale market in South Africa experienced significant changes during the 2009/10 financial year

• Ongoing network infrastructure expansion and improvement was done

• Broadband Infraco’s internal operational capability was bolstered by a number of key initiatives and capital projects in the past year.

Kimberly

East London

BellvilleCape Town

Durban

Pretoria

Johannesburg

Bloemfontein

Lesotho

Witbank

Worcester

Port Elizabeth

Aries

6

• Completed & commissioned initial 2.5 Gbits/s Lambdas for Neotel launch

• Installed new 10 Gbits/s DWDM Lambda on new fibre pair

Initial Network Infrastructure: 2006 / 2007

7

• Additional fibre routes to close the rings to provide service protection capability

• Overall capacity expansion

• Inclusion of Limpopo SDH Ring (Northern Ring)

Current Network Infrastructure: 2008 / 2010

WACS International Cable System (FY2009/10)

Slide 8

C&MA and Supply Contract signed on 8 April 2009

WACS governance structures in place

Supply Contract came into force on 25 May 2009

Manufacturing of various cable system components is underway

Portugal shore-end cable has been installed

Main fibre route installation (cable ship load 1) to commence shortly

The landing station in South Africa will be at Yzerfontein and the system is expected to go live during the third quarter 2011.

WACS International Cable System Update

Slide 9

The bulk of the wet plant (including cable, repeaters, power feed equipment and transmission equipment) has been manufactured and accepted by the WACS Inspection Authority.

The lay of the first cable load was terminated off the coast of Sierra Leone after the lay of 4353 km of cable.

The contracting for the supply of the transmission electronics for the section from Portugal to London was concluded.

The tender process for the WACS Network Operation Centre & Overall Maintenance Coordinating functions has also been concluded. The main NOC will be in Midrand SA.

• Broadband Infraco’s spending with companies meeting the necessary level 1 to level 4 B-BBEE contributor requirements was as follows for the financial year ending 31 March 2010:– Level 1: R 1.5 m (0.6%)

– Level 2: R 17.2 m (6.7%)

– Level 3: R156.6 m (60.7%)

– Level 4: R 77.6 m (30.1%)

Empowerment

Slide 10

Spending with companies meeting the minimum B-BBEE requirements was R252.9 m for FY2009/’10, constituting 98.1% of the total procurement spent in the period.

Competitive Suppliers Development Program spending amounted to R37.3 m (14.5%) in the form of initial upfront payments (of between 10% and 20% of total contract values), as well as suppliers benefitting from shorter payment cycles.

• At the end of the 2009/10 financial year, Broadband Infraco had a staff compliment of 76 (2009: 37). Currently the headcount is at 125

• This was complimented by outsourcing contracts with original equipment manufacturers and external service providers to ensure the necessary skills to operate and expand the network infrastructure

• Appointments were made in the functional areas of marketing, sales, network engineering, project management, finance, HR, procurement, legal, enterprise risk management and other business support functions

• Broadband Infraco racial equity and gender equity appointments equalled 79% and 46% respectively by year end

• Pleasing human capital development results were achieved with regards to the completion of tertiary and post graduate studies

• During the FY2009/’10, Broadband Infraco spent 4% of payroll on skills development, thereby exceeding the minimum 1% required by the Skills Development Levy Act

• Graduates from previously disadvantaged backgrounds were granted an opportunity to gain meaningful workplace experience through a two year internship programme covering the fields of network engineering, project management and network operations and maintenance

 Slide 11

Governance Report

Slide 12

Corporate Governance and Compliance • Ongoing progress has been made at Broadband Infraco in relation to

establishing and implementing business processes, organisational controls, compliance and governance practices resulting in clean PFMA and Compliance audits for the reporting period

• The Board of Directors was actively involved in charting the strategic direction for the organisation, significant network infrastructure investment decision-making and in the enterprise risk management processes of the entity

• The Board also provided effective oversight of the activities and operations of the company during the 2009/10 financial year

• Broadband Infraco developed and implemented a risk management policy and strategy, a fraud prevention plan and a whistle-blowing policy in the year under review

• Broadband Infraco documented and implemented a comprehensive Business Continuity Plan that includes a Disaster Recovery Plan for the network infrastructure and the new Network Operations Centre

• No lost time injuries or environmental incidents to report during FY2009/’10

Slide 13

Shareholders’ Compact Performance

Slide 14

Weighted Average Overall Achievement of Compact = 91%

KPA KPI Unit Target ActualExceeded / Achieved

/ Not Achieved

Strategic

Reduced Telecommunications Prices

% 60 73 Exceeded

Broadband Connectivity % 100 76 Not Achieved

Financial

Revenue Rm 334.0 317.5 Not Achieved

EBITDA Rm (95.4) (9.4) Exceeded

Net Profit / Loss Rm (216.7) (28.3) Exceeded

Debt Funding Rm 0 0 Achieved

Operations,

Customer & Capital Program

me

Actual time to restore core network faults

for 80% of all reported faultshours 8 5.7 Exceeded

Actual time to restore core network faults

for 20% of all reported faultshours 10 33.8 Not Achieved

Actual time to restore facilities related faults

hours 4.0 3.4 Exceeded

Availability of Network at Customer Service Level

% 99.50 98.76 Not Achieved

Increased Customer Base % 12 12 Achieved

Percentage of Projects put into Commercial Operation against

Approved Plan% 100 69 Not Achieved

Project Cost Variance against Approved Budget

% 5 (13) Not Achieved

Annual Financial Statements

Slide 15

Extract from External Auditors Report

• “To the members of Broadband Infraco (Proprietary) Limited:

– We have audited the annual financial statements of Broadband Infraco (Proprietary) (”Broadband Infraco”) Limited which comprise the accounting authority’s report, the statement of financial position at 31 March 2010, and the statement of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which contain a summary of significant accounting policies and other explanatory notes

• Opinion

– In our opinion, the financial statements present fairly, in all material respects, the financial position of Broadband Infraco (Proprietary) Limited at 31 March 2010, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act of South Africa and the Public Finance Management Act.”

KPMG Inc.Slide 16

Operating Results 1

• Operating revenue from the rendering of network infrastructure rental services for the year was R317.5 million (2009: R227 million), excluding the charge of R11.1 million (2009: R46.7 million) which has been accrued to recognise the straight-lining of operating lease income over the period of the lease agreement with Neotel in terms of IAS 17.

Slide 17

Statement of Comprehensive Income 2010 2009R'000 R'000

Revenue 306,400 273,688 Gross profit 71,580 203,502 Operating expenses (172,590) (302,607) Operating loss (101,010) (46,346) (Loss) Profit before taxation (39,797) 1,017 (Loss) Profit after taxation (28,312) 101

Operating Results 2

(Comparison to Budget & Corporate Plan)

• The operating revenue for the year of R317.5 million was below the total budgeted revenue of R334 million by R16.5 million. This variance was primarily due to budgeted incremental revenue from the South African Research Network and the wholesale market that was not realised during the reporting period.

Slide 18

Statement of Comprehensive Income 2010 2010 2010(R'000s) Actual Budget Variance

Revenue 317,500 334,000 (16,500) EBITDA (9,750) (95,380) 85,630 Operating expenses (407,100) (429,400) 22,300 Loss before taxation (39,797) (216,670) 176,873 Loss after taxation (28,312) (216,670) 188,358