The Complete IDC Intelligence Solution

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LISA THORNTON INC
On The Sustainability of USALs A Report
Prepared for the USAASA

• By Lisa Thornton Inc, subcontracting
• BMI TechKnowledge Group and
• Mukwevho Mkhabela Adekeye Inc
• 30 August 2006

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Outline

• Background
• The Terms of Engagement
• Process
• Findings and Conclusions
• Recommended Interventions

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ToE The USAL Licensees
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Lest We Forget !!

• The USA in USAL
• The USALs were licenced (inter alia)
• To enhance universal access in the most
  under-serviced geographic areas, and
• To extend participation in the provision of
  telecommunications services to persons who had
  been historically kept out of the market.

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The Process

• Written questionnaire,
• Site visits,
• Interviews with other interested parties,
• Desk-top research,
• Analysis,
• Written Report and presentations.

• Generally good co-operation from the USALs
• Except for one in the North West.

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Findings and Observations
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Findings

• On Corporate Governance
• Strong in some areas, though generally weak
• Reasons
• Training and support needed at board and
  management level
• Policies, systems and controls missing

• On Regulatory Compliance
• Compliance is evident in a number of areas,
  though none complies fully and totally
• No USAL operates its own network
• Many tended to be modelled along Reseller lines.

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Business Case
Financial Status Business Plans Technical
Plans
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Business Case Funding To-Date

• As at March 2006
• USF subsidy
• R35m in total for 7 USALs
• Shareholder contributions
• R6.2m in total for 6 USALs
• Bridging finance (banks)
• R1.1m for 1 USAL
• Working capital is generally not available
• Most USALs have used the USF subsidy for working
  capital.

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Business Case Future Funding

• IDC and Lucent - contingent on various issues
  including spectrum
• Four at advanced stage, one of which
  approved
• Pending
• Altogether R150m estimated
• Amatole, Kingdom, Ilizwi,
• Approved
• Altogether R65m for T3
• Vendor (approximately R14m)
• IDC (approximately R50m),
• Funding threatened by spectrum delays.

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Business Case - Spending To-Date

• Total spent on infrastructure (as defined by USA
  currently)
• R7.4m
• Bokone subsidy allocated
• Remainder of R35m subsidy and contributions from
  shareholders
• Most (est 80) spent on startup costs and
  operating costs
• Of which about R2.4 is for business/network
  plans
• balance on Opex/working capital
• Offices
• Rent
• Furniture
• Computers
• Salaries
• Repayment of shareholder loans (R1.2m)
• Very little retained

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Subscribers and Revenues Achieved Year 1

• Subscribers
• Estimated total of 17,000, with very little
  repeat business
• Average of about 3,000/USAL
• Ranges from 700 to 7,500
• Revenue
• Estimated total of R2.4 million from 3 USALs (Avg
  of R800,000)
• 2 USALs not disclosed
• 1 USAL not yet operational
• ARPU
• Approximately R20 for first 6 months
• Low for reasons USALs can explain
• Future didnt look too rosy!

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Business Plan Assessment

• Product Strategy/Market Plans
• Variable ability to do strategic market planning
  within USALs
• Most of the USALs plans were written by
  consultants and or vendors

• Profit/Loss
• USALs hope to go EBITDA positive in Year 3
• Unrealistic
• Highly sensitive to assumptions in business plan
• Market size
• Market share.

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Taxability of USF Subsidy

• SARS has ruled that the USF subsidy is taxable as
  gross income?
• Timing of subsidy allocation is therefore
  extremely important,
• Uncertainty has inhibited progress of USAL
  operations.

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Human Capital Issues

• Employee numbers
• Total of 48 paid employees
• 50 full time
• 50 part time
• An extra 40-50 non-paid volunteers
• Severe lack of skills
• Management
• Including governance
• Corporate business experience
• Telecoms industry exposure
• Legal and regulatory
• Technical
• Rely heavily on vendors
• Marketing.

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Business Case - Observation

• Insufficient shareholder capital to fund
  operating expenses
• Working capital to fund immediate future
  operations (cash flow),
• Inability to raise additional funding except
  possibly for infrastructure,
• Insufficient cash flow from current operations to
  service debt.

Almost none can continue operating for long
without further cash injections Significant
additional shareholder funding is
unlikely Bridging finance from banks is
unlikely Questionable usage of e.g. IDC funding
for working capital, which in turn is likely to
become more if infrastructure rollout begins
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Technical Plans
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Technology Selections

• Current Technology Selections
• No USAL operates its own infrastructure
• 6 are already using GSM by arrangement with MCTS
• 5 Vodacom, 1 MTN
• One has a reselling arrangement with Telkom

• Future Technology Selections
• Four have chosen CDMA (possibly five) all with
  Lucent as backer
• R50m rollout per USAL
• One WiMAX
• R50m rollout
• One CorDECT (MIDAS India)
• R15m rollout
• Ultimate plan R50m but will probably not be
  CorDECT.

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Interconnection

• Existence of interconnection arrangements
• Some are via Telkom to other operators
• Some are via Vodacom/MTN to other operators
• Cell C wants own interconnection agreement with
  USALs
• Cannot connect to/from Cell C at present via
  Vodacom/MTN
• Favourability
• Interconnection rates in each direction
• Relates to volumes of traffic (in/out)
• Net retention is most important parameter when
  looking at interconnection costs (outgoing calls)
• Needs more investigation

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Spectrum

• CDMA applied for Channel 65
• Timeous availability is critical
• Failing which whole USAL programme is threatened
• However, possible 12 - 24 months wait for
  regulatory processes
• Possible solutions
• Policy Directive from Minster to ICASA
• Test Licences
• Risky from legal point of view (would funders
  back them without a full licence)
• WiMAX applied for - 3.5GHz
• Maybe a problem because others want same
  frequencies
• Backhaul frequencies also applied for
• Doesnt seem to be an issue,

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Conclusions
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Conclusions

• Without significant interventions, involving
• the Minister,
• ICASA,
• the USAASA,
• the USALs themselves and
• other stakeholders,
• Most, if not all, of the USALs will not survive!

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Conclusions

• There has been a policy shift in focus
• From universal access (the building of
  infrastructure) to affordable access (providing
  low cost services)
• From basic telephony to value added services,
  such as access to the Internet

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Recommended Interventions
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Critical and Immediate Interventions

• USF USAL Subsidy
• Increase the subsidy
• Have a distinct opex funding mechanism
• Have a distinct capex funding mechanism
• How
• Amend USALs Licenses remove paragraph 8.4(c)
• Amend USA / USAL subsidy agreement.

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Critical and Immediate Interventions

• Spectrum
• Immediate spectrum availability is critical to
  the success of the USALs,
• Where requested spectrum cannot be immediately
  made available, alternative technical solutions
  must be put forward,
• There are knock-on financial effects with
  respect to alternatives.

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Critical and Immediate Interventions

• Interconnection
• Access to cost-based interconnection is critical
  to the success of USALs,
• Icasa regulatory process are pending,
• Delay in finalizing processes has negative
  financial implications for USALs (at least in the
  short term),
• More study is required on issues such as
  asymmetrical interconnection rates and their
  impact.

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Supporting Interventions

• Ministry / DOC
• Facilitate tax exemption of USF subsidies,
• Encourage government bodies to use USAL services,
• Facilitate the provision of financial and other
  assistance for complying with interception
  regulations,
• Increase activity and decision co-ordination
  between the DOC, Icasa and USA in respect of USAL
  program,
• Assure adequate funding for the USA to support
  USALs (eg. Training, research etc).

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Supporting Interventions

• ICASA
• Amend regulations
• Ownership and control
• Carrier pre-selection
• Number portability
• Amend licences
• Requirements re infrastructure rollout
• Remove requirements to file tariffs
• Remove licence fees pending profitability.

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Supporting Interventions

• USA
• Provide professional services resource and
  training centre
• Legal and governance
• Regulatory
• Technology
• Business and financial
• Facilitate access to USF monies in addition to
  the the USAL subsidy
• Needy persons
• Schools
• Telecentres

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Summary

• The USAL program objective has not been achieved
• Access and Affordability still Elude millions of
  SA citizens
• Interventions
• Subsidy
• Interconnection
• Spectrum
• Support Elements Advisory Agency or Training
• Legal Regulatory
• Marketing
• Technical.

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Thank you!!
Mandla Kuzwayo011-540-8000mandla_at_bmi-t.co.za