Presentation on

Broadcasting Amendment Bill, 2002

to the

Parliamentary Portfolio Committee on Communications

17 September 2002

9:00 AM

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• Introduction of team

• Time reviewing Draft Bill

• Board and management support broad principles outlined in Act and Bill (e.g. mandate fulfillment and proper accountability)

• Board and management bring depth and breadth of experience wrto operational realities

• Ways and means of achieving the objectives envisaged in Act and Bill

• Views/comments outlined in detail

• Thank you for the opportunity

Chairperson’s Introduction

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• Perpetual state of change

• Difficult media environment

• Challenges we face as a nation & unique role of SABC in meeting challenges

• Stability is required to ensure delivery

• Year in review

• SABC way forward

• Legislation must work to support delivery

GCEO’s Introduction (1 of 2)

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GCEO’s Introduction (2 of 2)

• Broadcasting Act, 1999 (“The Act”) in some areas works against underlying objective of repositioning the SABC

• SABC suggested amendments

• Many of the issues raised have been satisfactorily addressed in the Bill

• Some issues have not been addressed appropriately in the view of SABC

• A number of new issues have emerged in the Bill

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1. Corporate governance

2. Independence of the SABC

3. Conversion of the SABC

4. Re-organisation of the SABC

5. Regional TV services

Selected Areas of ConcernThere are areas of the Bill & the Act that concern the SABC.

6. Database of TV sets sold

7. TV licence fee allocation

8. Constitutional issues

9. Other major legal concerns

10. Drafting and other legal issues

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Corporate Governance Introduction

• Proposed amendments conflict with current best practice at a policy level (e.g. King Report 2002 and Draft Protocol on Corporate Governance in the Public Sector) and in legislation (e.g. PFMA and Companies Act)

• Specificity in Act with respect to executive committee impractical at operational and strategic levels

• Issues discussed under corporate governance include• role & structure of the Board of Directors• executive committee• Ministerial approval

• Sections discussed are proposed 6(2), 10(3), 11(2), 13(11), 13A, 14 and items 11 and 15 of Schedule 2, as well as 14(1) of the Act

7Corporate Governance Role & Structure of Board of Directors

(1 of 2)Role• In law, the Board of Directors is the “controlling mind” of the company• Section 13(11) currently provides that the Board “controls the affairs” of the

SABC• Proposed new section 13(11) reduces the role of the Board to mere policy

making

Structure• The Bill proposes in section 13A the creation of two management boards• Management boards intended to manage/oversee the PBS and PCBS divisions

of the organisation• Specific functions of the management boards will be set by the Minister in the

memo and articles• The Bill in attempting to create focus and efficiency would do the opposite and

add to the complexity involved in managing the SABC and delivering on its public service mandate

• Management Boards will require full-time Board members• Undermines the role of Board and the role of the executive committee

8Corporate Governance

Role & Structure of Board of Directors (2 of 2)• Create a cumbersome three-tiered management structure • Lead to the potential loss of current non-executive members of the Board, all of

whom are experts in their fields• The Board has structures and processes to deal with the SABC’s strategic,

operational and policy-related issues• Many of these issues cut across divisions• Board’s current structures are geared to dealing with this reality• Many mechanisms exist to ensure delivery (e.g. Shareholder Compact, MTEF, etc.)• Casting structure in legislation constrains ability to deal with operational realities• Replicate powers and duties of the Board and create conflict, which will in turn lead

to:• increased cost• decreased efficiency• loss of morale• corporate governance conflicts

Retain existing section 13(11) and delete proposed sections 13A and 14(1) in their entirety

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Corporate Governance Executive Committee

• Section 14(1) of the Act specifies the number of individuals who should form the executive committee

• Corporation operates in a dynamic environment

• Environment may call for a varying management and/or organisational approach at different points in time to achieve the policy and strategic objectives outlined in the Act

• If a management model is specifically cast in legislation (as proposed):• it is much more difficult to modify • much more likely to be out of sync with operational realities and strategic

imperatives • impact on delivery

Amend section 14(1) to provide for the Board to constitute the executive committee as it deems fit

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Corporate Governance Ministerial Approval (1 of 3)

• Proposed section 10(3) requires “old Corporation” in respect of the PBS division to submit to the Minister for approval:• a proposed budget• a three-year business plan• policies (including codes of conduct) relating to :

• news• programming• local content• education• universal service and access • language

• Similar obligations are cast by the proposed section 11(2) on the SABC in relation to its PCBS division

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Corporate Governance Ministerial Approval (2 of 3)

• In terms of the proposed item 11 of schedule 2:• the SABC must submit, for the Minister’s approval, inventories of

all its assets, rights, obligations and liabilities in respect of its PBS and PCBS divisions

• In terms of the proposed item 15 of schedule 2:• the SABC must submit for Ministerial approval the deemed

market-related considerations upon which any of the assets or rights of the SABC are to be made available to the PCBS division and the deemed market-related considerations upon which services are to be rendered by the PBS division to the PCBS division and vice versa

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Corporate Governance Ministerial Approval (3 of 3)

• Such provisions are undesirable because:• They amount to “micro-management” • No criteria or guidelines are set out • No provision made for what happens if no approval given• Undermine independence, editorial and otherwise, of the

SABC

Delete proposed sections 10(3), 10(4) and 11(2) and items 11 and 15 of schedule 2

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Independence of the SABC (1 of 3)

• The Bill proposes deletion of current section 6(2) that currently provides:• that the SABC will “in pursuit of its objectives and in exercise of

its powers enjoy freedom of expression and journalistic, creative and programming independence”

• The SABC welcomes the Minister’s proposal to reinstate 6(2)

• However the proposed sections 6(3)-(5) call for the following:• an obligation to ensure “accurate, accountable and fair reporting

by the Corporation in order to advance the national and public interest of the Republic”

• and a further obligation to submit to the Minister for approval policies in terms of which that obligation will be discharged

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Independence of the SABC (2 of 3)

These proposed changes will:

• Question Parliament’s commitment to freedom of expression

• Undermine the independence of the SABC as the public broadcaster

• Create the perception that the State seeks to strengthen its control over the public broadcaster

• Undermine the credibility of the SABC as an independent public broadcaster

• Inappropriately duplicate existing safeguards

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Independence of the SABC (3 of 3)

• A Ministerial power to approve SABC’s policies and codes of conduct will strengthen these perceptions

• The proposed section 10(4) inappropriately equates policies with codes of conduct

• Codes and policies reflect values which may change over time and ought not be cast in legislation

• Retain section 6(2) and • delete proposed sections 6(3), 6(4), 6(5), 10(3)(c), 10(4)

and 11(2)(c)

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Conversion of the SABC (1 of 3)

• The Act provides for a transfer of assets of the SABC to a new company, SABC Ltd

• The Bill recognizes that the current wording is unworkable and introduces the notion of “conversion” of the SABC

• The SABC supports conversion as it minimizes its financial, legal and other risks to the Corporation

• There is a technical difficulty with the proposed section 7(1)• contemplates conversion but does not set out the mechanism to effect the

conversion• the concept of conversion of a statutory corporation is not catered for in the

Companies Act • therefore, the conversion must be “deemed” to occur in the Bill

Presentation to Parliament 17 September 200217

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• All contracts, licences, assets etc, have to be transferred individually

• Material contracts could be left behind• High likelihood of breach of change of control

covenant in existing contracts• Consent of 3rd party holders and creditors

required to effect transfer• Increases difficulty of dealing with contracts

governed by foreign law• Tax liability of R263.4M on reserves• Donation tax could be raised if transfer seen as

donation• Impact on capital allowances in terms of sec 11(e)

if transfer of assets seen as sale by connected party

• Permission must be sought from all employees for transfer

• All contracts, assets, liabilities, licences and employees remain with one entity - no transfers or assets left behind

• Easier dealing with 3rd party contracts governed by foreign law

• No consents required from relevant creditors and third parties

• Less likely to breach change of control covenant

• Licences need not be transferred• Transaction documents needed for transfer

unlikely to be required • Easier to deal with existing litigation• No risk of conversion being treated as a sale of

assets

Deemed conversion is clearly the best option.

Risks of Transfer Benefits of Deemed Conversion

Conversion of the SABC (2 of 3)

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Conversion of the SABC (3 of 3)Proposed Changes

• Redraft the proposed section 7 to clearly indicate the conversion is “deemed” to happen

• Include proposed items 1 to 9 of schedule 2 of the Bill in section 7 of the Act

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• The PBS division is partially funded by public monies

• Therefore the public and Shareholder are entitled to ensure and be assured that public funds provided for PBS are utilized substantially for that purpose

• Similarly, assets of the SABC acquired with state and public funding should not be used to serve PCBS without appropriate compensation

• Proposed items 10-15 of schedule 2 are aimed at achieving these objectives

• Section 9 of the Act provides for the divisions and their separate administration and financial records

• Section 10(2) provides for the funding of PBS

• Section 11 provides for cross-subsidisation of PBS by PCBS

• Section 27 provides that television licence fees be used solely for PBS

Re-organisation of the SABC Relationship Between PBS and PCBS (1 of 4)

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It will however, be counter-productive and impractical, if not impossible, to implement in the manner contemplated in the Bill

• “Holder” of rights and assets has no accepted legal meaning when used in this context

• SABC Ltd will own all of the assets

• Not possible to determine the “true income and expenditure” without investigating the SABC’s obligations and liabilities

• SABC has over three thousand contractual relationships

• Majority of contracts located in central support services and are difficult to unpack and allocate to a specific business unit (e.g. software licence and foreign acquisitions)

• Majority of our material contracts are of a short-term nature (expire with the next two years)

Re-organisation of the SABC Relationship Between PBS and PCBS (2 of 4)

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• The solution provided by items 10-15 of schedule 2 is too rigid and prescriptive…• the Minister must approve the “deemed market-related considerations” of all

the thousands assets or rights made available by PBS to PCBS

• …But it is also too vague since it fails to stipulate how disputes about such values are to be resolved

• The SABC suggests that the Board be required to :• state in its annual financial statements that all such transactions have taken

place at fair value• no funds or licence fees provided for PBS have been used for PCBS• SABC’s auditors should provide an opinion in this regard

• The SABC is developing and will submit to the Minister as representative of its sole shareholder an accounting policy designed to achieve the arm’s length divisional relationship contemplated by the Act

Re-organisation of the SABC Relationship Between PBS and PCBS (3 of 4)

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Funding Model• This model flows from the financial model and will assist in understanding the

impact of key strategies on the finances of the SABC• Proper accounting for PCBS and PBS divisions at core of corporation’s current

financial efforts

Transfer pricing policy and model• This model will ensure that internal charges between business units are

accurately calculated• It will also assist in ensuring that transfer pricing between PBS and PCBS is

appropriate and accurate, thereby preventing cross-subsidy• Policies with regard to transfer pricing are also being developed• An advanced costing system will also be developed to ensure successful

implementation of the policies and the model

Re-organisation of the SABC Relationship Between PBS and PCBS (4 of 4)The SABC is in the process of developing mechanisms to ensure

and improve accountability.

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Situation:• Bill proposes insertion of section 32A dealing with regional TV services to be

established by the Department• SABC supports any sustainable measures directed towards providing services

to marginalised official languagesComplication:• In absence of having sight of any detailed feasibility study the SABC is

not in a position to meaningfully comment on the proposed section• SABC has initial concerns around impact on the industry and the following

issues:• timing• infrastructure rollout• financial viability• funding• licensing process• impact on the viability of the SABC must be determined• constitutionality

Regional TV Services

Review proposed section 32A

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Situation:• Bill proposes in subsection 27(6)(f) that a database of all TV sets sold be

maintained by the Corporation

Complication:• Legislation makes no distinction between new and used TVs• TV licence obligation for individual users is per household and not per TV set• SABC is burdened to create a national database register of all sales of TV sets

without the financial and regulatory resources to do so• Regulations dealing with information regarding TV sales are not drafted with such

a database in mind

Database of TV Sets Sold

Delete proposed subsection 27(6)(f)

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• Proposed section 27(6)(d) requires that all television licence fees be used by the SABC solely for its PBS

• There are numerous group functions which service both PBS and PCBS

• Subsection 27(6)(d) should accordingly provide that licence fee revenue should fund PBS and “all related administration and functions”

• The proposed subsection 27(6)(f), which provides that the Minister must issue policy directives on the use of television licence fees, should be deleted:• the Minister already approves the SABC’s annual corporate plan and budget• the Minister is not conversant with the details of the SABC’s financial affairs• the provision is unclear

TV Licence Fee Allocation

• Amend proposed subsection 27(6)(d) as suggested above• And delete proposed subsection 27(6)(f) (as previously

suggested)

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Constitutional IssuesRelevant Provisions

Section 16 of Constitution• “(a) freedom of the press and other media • (b) freedom to receive or impart information or ideas”

• Section 7(2) : SABC and Parliament must “respect, protect, promote and fulfill” the fundamental right of freedom of expression

Section 192 of Constitution• “National legislation must establish an independent authority to

regulate broadcasting in the public interest, and to ensure fairness and a diversity of views broadly representing South Africa society.”• Government cannot direct how ICASA must regulate broadcasting• Parliament cannot regulate broadcasting itself

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• Insertion of new section 32A• establishes two regional television services• determines the areas within which they operate and obligations

relating to the language of broadcasting• directs the Authority to license the regional broadcasters

• Huge restructuring process envisaged by section 32A

• Cannot risk the disruption of an adverse Constitutional Court decision several years down the line

Constitutional IssuesThe Insertion of Section 32A (1 of 2)

To advance the aims of equality, diversity and the promotion of indigenous language, Parliament must ensure that any plan for regional broadcasting is

implemented in accordance with the Constitution

• Infrastructure development• Roll-out of programming

plans

• Start-up financing• Human resources transfer

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Constitutional IssuesThe Insertion of Section 32A (2 of 2)

• Proposed section addresses core issues in broadcast regulation

• act of issuing broadcast licences

• decision whether to license regional broadcasters

• decision of how many regional broadcasters should be licensed

• in respect of which regions?

• with what obligations relating to the language of broadcasting?

• These questions are reserved by section 192 of the Constitution for ICASA

• Parliament cannot decide them directly in legislation

Section 32A likely to be struck down as unconstitutional

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• Insertion of new sections 6(4), 10(3)(c) and 11(2)(c) of the Act require Ministerial approval of SABC broadcasting policies:

• Violation of section 16 read with section 192 of Constitution

• Limits right of the SABC to broadcast information and Right of public to receive information

• Unguided discretion is contrary to rule of law• Minister given functions which Constitution vests in ICASA

Constitutional IssuesMinisterial Control of SABC Policies

Sections 6(4), 10(3)(c) and 11(2)(c) unconstitutional

• Accountable and fair reporting• News and editorial matters• Programming policy

• Local content policy• Language policy• Educational policy

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• Existing section 6(2) guarantees SABC’s “freedom of expression and journalistic, creative and programming independence.”

• Deleting 6(2) unconstitutionally limits freedom of expression of the SABC and its viewing and listening public

• Unconstitutional purpose of limiting section 16 of Constitution

• Clear violation of duty on State under section 7(2) of the Constitution to respect, protect, promote and fulfil the fundamental right of freedom of expression.

Constitutional IssuesClause 6 and the Deletion of section 6(2)

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Other Major Legal Concerns (1 of 2)

Broadcasting Licence• The proposed definition of “broadcasting licence” requires amendment by the

inclusion of a reference to the IBA Act

Conversion• The “deemed conversion” model needs to be adopted consistently throughout

the Act to avoid the dangers of an actual conversion.• This requires amendments to subsection 7(1) and items 1-9 of schedule 2• The requirement in the proposed subsection 7(3) that the Minister must deliver

the memorandum and articles of association of the Corporation needs to be more specific about the content of these documents

SABC’s licences on conversion• The proposed section 22, which deal with the issuing of new licences to the

SABC upon conversion should be amended• Upon conversion licences issued to the old Corporation shall be deemed to

have been issued to the Coroporation as at the effective date of the conversion

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Other Major Legal Concerns (2 of 2)

TV Licence Fees• Amendments proposed by the SABC were intended to create four

categories of licences, including lessors• Bill incorporates some aspects of Corporation’s proposal• Concerned about exclusions, particularly of lessors• The concept of “lessor” as a licence holder needs to be applied

consistently in the Act

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Drafting and Other Legal Issues

• Amendment to definition of “free-to-air” services in the act to accommodate distribution by the SABC of its signal by means of satellite

• Amendment to proposed definition of “multi-channel distribution services”

• Deletion of the proposed definition of “radio station”

• Amendment to the definition of “television licence”

• Consequential amendments to subsection 4(1) of the Act and proposed subsections 4(6)-4(8), dealing with broadcasting licences

• Amendment to proposed subsection 5(3) to include global reference to IBA Act

• Amendments to items 1,5 and 6 of schedule 2

• Deletion of existing subsection 14(2) of the Act

• Amendment to subsection 18(4) of the Act

• Deletion of the proposed subsection 24(4) of the Act

• Deletion or amendment to subsection 25(1) of the Act

• Deletion of existing subsection 26(3)-26(7) of the Act

• Amendments to the proposed section 27 of the Act

• Deletion of the proposed subsection 28(3) of the Act

• Amendments to the proposed revision of section 31 of the Act

The SABC makes the following proposals:

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Conclusion

• Detailed comments contained in written submission

• Covered areas touched on in written submissions as well as others

THANK YOU

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QUESTIONS

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Appendix

Contains detailed comments on areas of concern and suggestions on ways to address

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Overview of Time Spent Corporatising

Average = 15 months

On average corporatisation processes have taken 15 months**.

*Corporatisation process still ongoing; **time estimated from the time internal action was initiated on the part of company; please note does not include time to draft original legislation initiating the corporatisation processSource: Interviews (Metelec: Andersen Consulting, SAA : Gasant Orrie, Eskom: Benji Mothibedi;)

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Independence of the SABC (4 of 5)International Examples

• “We believe it to be in the interests of Our Peoples in Our United Kingdom…that there should be an independent corporation which should continue to provide broadcasting services…” (BBC Royal Charter)

Cornerstone of public broadcasters around the world is the explicit statement of independence

BBC

CBC• “The Corporation (CBC) shall, in the pursuit of its objects and in the exercise

of its powers, enjoy freedom of expression and journalistic, creative and programming independence.” (Canadian Broadcasting Act)

ABC• “The corporation shall take account of the responsibility of the corporation as

the provider of an independent broadcasting service…” (ABC Charter – section 6 of ABC Act)

• “The ABC Act guarantees the editorial independence of the Corporation’s program services…By law and convention neither the Government nor Parliament seeks to intervene in those decisions.” (ABC Code of Practice)

• “It is the duty of the Board … to maintain the independence and integrity of the Corporation.” (Section 8 of ABC Act)

RTHK• “To provide timely, impartial coverage of local and global events and issues”

(Mission statement and Framework Agreement)• “Editorial independence, Impartiality, Serving the public…” (Vision)

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• The core features of the SABC’s accoutning policy are:

3. Re-organisation of the SABC Relationship Between PBS and PCBS (1 of 5)

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BBC Funding Mix

£850 M

£2,533 M

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenue

% Of

Rev

enue

Licence Revenue

CommercialRevenue

SABC Funding Mix

R 1,818 M

R 355 M

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenue

% Of

Rev

enue

Licence Revenue

Commercial/Other

The SABC is different from the BBC in that it is majority funded (84%) by commercial/other sources, while the BBC is majority funded by licence fees (75%).

3. Re-organisation of the SABC Relationship Between PBS and PCBS (3 of 5):

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• In South Africa, the desire to separate PBS and PCBS have been incorporated in the White Paper, Act and Bill in part in two ways:• separate management structures • separate accounts for the two divisions of the Corporation

• In the case of the SABC it is not as straight forward as it is for the other public broadcasters

• Our public service is currently and is likely to remain, in the near to medium term, funded primarily by commercial means

3. Internal Re-organisation of the SABC Internal Restructuring

Relationship Between PBS and PCBS (5 of 5)

What is therefore required is an approach that takes into account our unique situation rather than trying to impose a model that is inappropriate

to our specific context

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• Situation:• Bill, in proposed item 13 of Schedule 2, deals with the allocation of rights

and assets

• Stated aim is to ensure the true income and expenditure incurred by the Corporation in rendering a public broadcasting service and the commercial broadcasting service

• States the public services division must be regarded as the holder and owner of all the assets and rights of the Corporation as the date of conversion

• Proposed items 14 & 15 of Schedule 2 deal with arm’s length contractual relationships between the PBS division and the PCBS division

3. Internal Re-organisation of the SABC Internal Restructuring

Allocation of Rights and Assets (1 of 6)

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• In the SABC’s view, these provisions are sufficient to ensure objectives of divisionalisation are met

• Unlike some other public broadcasters (example BBC), the vast majority of SABC funding is drawn from commercial sources – approximately 84%• According to a 1999 McKinsey report, the SABC has one of the highest

proportions of commercial funding of any public broadcaster in the world

• PBS expenses are X times higher than TV licence revenues

• Even if all TV licence fees are allocated to PBS, approximately 72% of the PBS division’s funding will be drawn from commercial sources

3. Re-organisation of the SABC Relationship Between PBS and PCBS (3 of 5)

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As previously mentioned, delete proposed items 13-15 in schedule 2

3. Internal Re-organisation of the SABC Internal Restructuring

Allocation of Rights and Assets (6 of 6): Proposed Changes

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1. Corporate Governance Role of Board of Directors (1 of 2)

• In law, the Board of Directors is the “controlling mind” of the company

• Section 13(11) currently provides that the Board “controls the affairs” of the SABC

• The Board has created sub-committees to deal with various aspects of its business

• The proposed amendments to sections 13(11) and 14(1), and the introduction of section 13A will:• Remove the Board’s power of management and control over the

SABC and invest the power it has in two “management boards”• Reduce the Board to a mere policy making organ

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1. Corporate GovernanceExecutive Committee (1 of 2)

• The Act specifies the number of individuals who should form the executive committee

• In the White Paper, however, section (2.2) dealing with the Corporation’s Charter states the following:

(The statutory charter … will have the following features) operate through its Board of Directors, which will independently exercise management of the

SABC through the management team it chooses …

• Board and Management maintain that the above section is appropriate and should have been extended as a principle in the Act to allow the Board and Management to institute the appropriate management structures to achieve the policy objectives in the White Paper and the subsequent legislation

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• The PBS division is partially funded by public monies

• Therefore the public and Shareholder are entitled to ensure and be assured that funds provided for PBS are utilized substantially for that purpose

• Similarly, assets of the SABC acquired with state and public funding should not be used to serve PCBS without appropriate compensation

• Proposed items 10-15 of schedule 2 are aimed at achieving these objectives. It will however, be counter-productive and impractical if not impossible to implement the manner contemplated in the Bill

• It would be appropriate for the Act to require the Board to formulate and submit to the Minister a policy which will achieve these objectives

• The SABC has already taken steps to ensure transparency in relation to its assets, liabilities, income and expenditure by:• Undergoing a detailed due diligence and submitting report to Minister• Involving the Department in all due diligence exercises related to the

conversion of the Corporation

4. Re-organisation of the SABC Relationship Between PBS and PCBS (1 of 6)

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• The objectives of the internal re-organisation into PBS and PCBS are to ensure that:• public funds are not utilised for PCBS• PCBS does not compete unfairly with other commercial broadcasting

services

• Section 9 of the Act provides for the divisions and their separate administration and financial records

• Section 10(2) provides for the funding of PBS

• Section 11 provides for cross-subsidisation of PBS by PCBS

• Section 27 provides that television licence fees must be used solely for PBS

4. Re-organisation of the SABC Relationship Between PBS and PCBS (2 of 6)