The City of Jo’burg (CoJ) is to sell its failed broadband network assets to a winning bidder for between R853 million and R1 billion.
The network – which consists of a total of 900km of fibre, covering large parts of Johannesburg, including Orange Farm, Diepsloot, Alexandra and Soweto – is currently housed in the Metropolitan Trading Company (MTC).
MTC is CoJ owned entity established in 1999 with no expertise of running the broadband network.
Recently, MTC issued a request for bids for a single buyer who will also serve as a service provider to sell the network assets to the service provider. For more read: The City Of Jo’burg Is Selling Its Broadband Network Asset
The service provider will sign a 12-year contract to own the asset, maintain and upgrade it and commercialise the network.
MTC will have a right of first refusal if the service provider decides to sell the network.
The request for bids closes on 24 June 2019.
A successful sale will allow MTC to retain the business, honour its financial obligations and perform its intended mandate at a profitable level, through obtaining services from the service provider at discounted rates, said the entity in a business plan for 2018 / 2019.
The sale of the network asset will transfer ownership of all the physical components of the network asset, which includes the passive network and the active network. It will also include the transfer of liability of all contracts currently signed with service providers who are leasing current dark fibre assets.
Furthermore, the successful bidder will incur all capital expenditure and operational expenses related to new (added) network components and maintenance from the date of sale.
The carrying value of the network assets and intangible assets amounted to more than R538 million as at 28 February 2019.
The total projected revenue from external customers over the 12 years estimated from R8.5 billion to R13 billion, said MTC.
As of 30 June 2018, MTC’s audited total revenue was R191 million and is projected to increase in the 2018/2019 financial year from R250 million to R350 million. Its revenue is generated either by internal customers such as municipal-owned entities and government departments or external customers (private bodies such as MTN, Internet Solutions, and Link Africa).
However, its financial position reflects accumulated losses of R656 million as a result of losses incurred in previous fiscal years, making it unable to service the R1.25 billion shareholder loan to CoJ, which has increased to R1.7 billion, as at 28 February 2019, due to interest.
MTC also disclosed in the business plan that of the projected revenue, MTC currently has existing contracts to the value of approximately R240 million over the 12 years.
“As part of the sale of the asset, MTC expects to receive between R100 million to R150 million as proceeds towards these contracts that will be foregone as a result of the sale,” MTC explained.
“Therefore, the total gain from the sale of the asset ranges between R315 million and R470 million.”
MTC appointed Accenture to conduct an independent valuation of the network in June 2018.
The primary mandate of MTC around the management of the broadband network asset is to connect the CoJ and enable smart City, thereby bridging the digital divide.
The development of the MTC network aimed at enhancing service delivery through E-Health, E-Learning, E-Licencing, E-Property, digitally enable safer communities and other Smart City solutions, plus contributing to social responsibility – through bridging the digital divide, providing free Wi-Fi.
Furthermore, citizens in low‐income areas are particularly vulnerable, and broadband is essential to help level the playing field.
“As the world becomes increasingly connected, broadband access is key to education, job training and even access to one’s medical records,” said MTC.
“We expect bidders to this RFP to be sensitive to this reality and to be willing to work with MTC to develop creative solutions for supporting all members of the community with equitable services.”
The City aims to achieve, amongst others, 5% economic growth by 2021 and MTC must contribute to this growth through economic development, enhanced service delivery, enabling digitalisation of the City, and contributing to social responsibility.
The organisation said its mandate to advance service delivery, and revenue generation is hampered by insufficient capital budget, limited skill set and capacity to enhance and upgrade the network.
History of the COj network
- In June 2010, Ericsson South Africa was commissioned to Build and Operate a City-wide broadband network for the City of Johannesburg over 15 years. The Broadband Network would be transferred back to the City after the 15 years. Of the 15 years, the first three years contracted for the building of the broadband infrastructure and the following 12 years would be for the service provider to operate and commercialise the Broadband Network to realise its investment with the City and its entities being the primary tenant for the service provider.
- Ericsson South Africa subsequently ceded the agreement with the City of Johannesburg to Citi Connect Communications to build the Johannesburg Broadband Network. The City of Johannesburg, together with Ericsson South Africa, established B-Wired to operate and commercialise the network for the duration of the Build, Operate and Transfer contract.
- By the middle of 2013, CCC had built approximately 900 kilometres of the system, and B-Wired had already started operating and commercialising the network. An assessment of the building and operation of the Broadband Network, however, revealed significant breaches of the agreement. The City had to terminate the BOT agreement due to non-performance on CCC’s part and other violations of the contract.
- The City planned to use the Broadband Network to lower its costs and those of its Municipal Owned Entities and to increase access to telecommunications services by its residents in the City, and in the process stimulate economic development and improve Municipal service delivery.
- In September 2015, MTC, the MOE established by the City of Johannesburg to take over operations of the Broadband Network, received the transfer from the City of Johannesburg of the Broadband Network as a going-concern telecommunications business with network assets, intangibles and creditors for approximately R1.25 billion, financed by means of a shareholder loan account. – lourie@techfinancials.co.za
