Infraco's 'sad state of affairs'

Broadband Infraco is still cleaning up its books and investigating whether any staff benefited from a tender awarded before the state-owned entity's launch, and may press charges if evidence of bribery is found.

Broadband Infraco, which came to market about a year ago, is meant to lower the cost of broadband by providing a national telecoms backbone to telcos in SA, to lower the price of connecting to undersea cables.

However, the entity is still re-evaluating irregular, fruitless and wasteful expenditure, worth more than R150 million, a process that may not be completed by year-end due to an ongoing forensic and police probe.

During a recent Parliamentary committee on public enterprises meeting, members heard Infraco did not comply with National Treasury regulations and the Public Finance Management Act (PFMA) in the last financial year.

The committee's acting chairman, Gerhard Koornhof, said Infraco's annual report was not the best he had seen during his time in Parliament. He added that what Infraco reported to the committee was a “sad state of affairs and very frightening”.

Infraco generated a net loss of R207 million for the 2010/11 financial year, compared with the R28 million loss in the previous year. It also generated less revenue than expected, at R297 million, compared with its R412 million budget.

It received a qualified audit, as KPMG could not verify whether fruitless and wasteful expenditure disclosed as R1.9 million and irregular expenditure disclosed as R151.1 million was all fruitless and wasteful expenditure and irregular expenditure during the year.

Infraco now has new management and is focusing on a turnaround plan and a R700 million capital investment programme will enable it to meet its commercial targets and objectives to service under-serviced areas. The entity is expected to make a loss for the next four years.

Andrew Shaw, who became CEO after the latest annual report was published, acknowledged that Infraco had a challenged history.

Shaw said Infraco might still have a table of “irregular expenditure” in the future as items came “out of the woodwork”. He said it would take time for it to be turned around.

He could not judge whether the amount of irregular expenditure was complete, although Infraco was focused on improving its document management system to avoid another qualified audit.

Shaw noted, when he joined the company, he was asked to look at the storeroom, an old office, with unfiled documents lying on the floor. The company had made an effort to track and file all paper work from a year ago.

CFO Ramasela Magoele said Infraco was in the process of condoning all irregular spending, some of which had not been resolved due to the ongoing investigation. Infraco could have some spending still needing to be condoned by year-end, she added.

According to the entity's latest annual report, internal auditors investigated the fibre-optic cable framework agreement for short term-engineering contracts with three bidders last October.

The probe, wrapped up in November, uncovered a significant number of “control weaknesses and breaches in delegations of authority”. The tender has been referred to the South African Police Service to uncover whether money changed hands.

In addition, a forensic investigation was launched in January to probe all contracts awarded that were worth more than R10 million.

Spokesman Thamie Mthembu says the forensic investigation is ongoing to determine whether money changed hands. However, he notes that “these are old matters” and the company has had a clean slate since March.

Mthembu adds there is currently no evidence that money changed hands as no arrests have been made.

Shaw said auditor Deloitte, which was called in to handle the probe, should provide feedback by year-end, which would give Infraco an indication as to whether funds had gone missing and staff had received bribes. Once the investigation had been included, Infraco would initiate criminal proceedings if necessary, he added.

Disciplinary action was taken against six staff members that had been implicated in irregularities and staff went through governance and PFMA training, said Shaw. The qualified audit led to four new executive managers being appointed.

In some areas, there had been no governance framework at all and poor internal control processes had been a major weakness, which resulted in measures being put in place, said Shaw.

Steven Ambrose, MD of Strategy Worx, says government should get rid of Broadband Infraco and stop trying to play in a space that it regulates.

Ambrose says the concept behind the entity is flawed and Infraco is now spending more money trying to track down wasted cash. He says the problem with investigations is that they involve looking backwards, and waste time and money.

Infraco “can't hope to move forward until they have cleaned up the past,” notes Ambrose. He says the effort required to investigate irregularities means the company is not focused on delivering on its mandate, which is to expand broadband connectivity and cut the cost of communications.

Among the targets Infraco missed was 100% broadband connectivity, availability and access, achieving 71% instead. However, Shaw said the entity met a number of targets, including dropping pricing for telecommunication services and improving its operating profit.

Infraco reported on its financial performance for the six months since the publication of the annual report in March and indicated it was on track to meet its targets for the current financial year.

The entity would focus on strengthening its network through investment in infrastructure, noted Shaw. He said the investment was necessary so that Infraco would be able generate the kinds of revenue it needed to from a commercial perspective.