SAA & SA Post Office recapitalisation: performance progress report

Meeting report

Opening
At the start of the meeting, the Chairperson read aloud some comments: SOEs are central to advancing national objectives of economic and growth and overcoming inequalities. Government recapitalised SAA with R10 billion to cover 2016/7 debt and working capital, which brings the total guarantees to  R19.1 billion. Without rigorous reform of the operational model and corporate governance, the long-term survival of the institution will be at risk. We wish to assure South Africa that we are on track with NDP objectives and that the SAA turnaround is on track. The Chairperson said with these remarks, let us have a free, open and robust discussion. Don't hide info from us; we can only be effective, if we have the information.

SAA should assure the public that the turning around of SAA is on track. She said the Deputy Finance Minister was present to give a quick brief to the Committee before he is due to make an input at Cabinet on the SAA matter.

Deputy Finance Minister’s comments on South African Airways
Deputy Minister Mondli Gungubele stated that most of remarks made by the Chairperson had a lot to do with what they were aimed at achieving at SAA. He noted that they were in the process of securing the resources for the purpose. The presentation would provide more information on the progress in the turnaround strategy of SAA which had a financial and corporate governance and operational model crisis. These problems needed urgent attention. They needed a good medicine. Unless these problems were sorted out, it would be difficult to accommodate new ideas. The path to recovery for SAA had been well considered by both the new board and National Treasury and it had conducted an independent review. The path had been tested scientifically. There was a clear turnaround strategy which was well received particularly in the financial sector in terms of its logic and we believe in this strategy. By 2021, SAA would have recovered from its losses and debts. However, for us to move from here to there, money is needed. In 2017/18 SAA had a loss of R5 billion; in 2018/19 we are looking at a R5 billion net loss and R2 billion in 2019/20. During that time the R9.2 billion debt would have matured and must be paid. They needed R20 to 21 billion in order to break even in three years’ time.

There were other options: They could throw this entity away. The obligations would be no less than R60 billion as opposed to turning this company around. On the recent speculation that government was considering the sale of struggling entities, the Deputy Minister stressed that the timing was not right for government to consider cutting its ties with SAA.  Government had accepted that it is worth it to stick it out and we are open to being interrogated on the information given; hence they had nothing to hide. They had been interrogated by the Standing Committee on Public Accounts. And we will be having another meeting with this Committee. What they were doing was to ensure that an optimum capital structure was in place. They wanted to ensure that the machinery of turning SAA around was sound and firm and that the Committee would be able to conduct its oversight.

In response to the Chairperson asking if the Deputy Minister could be allowed to leave or whether they wanted to seek some clarity, Members unanimously agreed that they would like to seek clarity.

Ms S Shope-Sithole (ANC) said that she would like to give advice. The most important thing was that the oversight of the Minister over SAA ought to take the recommendations from the Standing Committee on Public Accounts (SCOPA) very seriously. National Treasury should do its best to ensure this Committee does not have to make similar recommendations as already advised by others.

Mr A Shaik Emam (NFP) remarked that the problem of financial instability resulted in requesting loans and more loans and asked if there was no other way to get out. The main question was why private entities were able to make a profit but public entities were unable to do the same. Another problem was contracts that were running for more than 30 years.

Mr N Paulsen (EFF) remarked that there are many domestic airlines that are successful. They were successful as they were on the Johannesburg Stock Exchange. He felt that SAA was not doing well because it was lacking skills. SAA should retain good skills needed to turn it around. He was not supporting the privatising of SAA. This was due to the perception that the private industry would make a profit and that public industries had difficulties in managing their businesses – and he could not understand why.

Mr A Lees (DA) thanked the Deputy Minister for his commitment and dedication for attending two meetings in a row.

The Deputy Minister responded that the implementation of recommendations was a non negotiable and remarked that Members knew his attitude on that. He remarked that aviation and transportation were not inseparable. If one looked at the fiscal framework, one of main elements was transport regulation. They were using this regulation so things could be able to move forward. The critical challenge was that the public entities were not financially sustainable. The state had to control entities through their boards. There should be a balance between the board and executive management. They should work to be self-supportive. They should be accountable to society. The skills were not the main issue, but accountability.

South African Airways (SAA) briefing
Mr Johannes Bhekumuzi Magwaza, SAA Board Chairman, commented that the challenges that SAA was facing were huge. When they started in November 2017, they found that there were problems with the Board and Executive Management. There were problems with shareholder. He was pleased to say that SAA had the Board which was working extremely well with the shareholder. They were good interactions. The Deputy Minister, in his opening remarks, had touched on engagements between the National Treasury and the Board. The Board should have an active oversight done by the Committee. In so doing, they would be able to come up with a strategy of dealing with liquidity problem. They would be able to ensure that the optimum capital structure of SAA was on track and that the new strategy worked. He asked the CEO to touch on the aspects of oversight and what they wanted to achieve in his presentation. There were lot of work that needed to be done to ensure leadership stability. The new management had been dealing with the filling of vacancies and with the development of a clear plan. When they were appointed, they found the control environment totally dysfunctional. They were getting on top of that and they could assure the Committee that the supply chain management, the finance management and the executive management were well functioning. Without functioning, there was no reason to say that an entity existed. Due to the PFMA and other regulations, the supply chain management at SAA was necessary, but needed to be modernised. In this respect, they were working hand in hand with the National Treasury. Due to financial constraints, some flights were cancelled. This problem was noticeable to everyone. Some people held a belief that SAA owed them a living. A turnaround strategy was therefore necessary to bring a change. The productivity of the people however was still very low. The government was however not considering a sale, despite the cost to government of running it and the financial challenges faced. The board assessed the possibility of putting the carrier under business rescue as unions have demanded. Under the former SAA chair, Dudu Myeni, the national carrier was hobbled with financial constraints and stayed functioning, in part, through government guarantees. SAA had already told National Treasury that it would need R5 billion to meet its debts.

The Chairperson stated that the Committee was looking for a balance between performance and compliance.

Mr Vuyani Jarana, SAA Chief Executive Officer, briefed the Committee on the current state of the airline and market; the turnaround strategy implementation and strategic options; risks; governance, supply chain and audits; and the oversight forum.

Mr Jarana said that, in recent years the South African Airways Group (SAAG) had experienced management turbulence, deteriorating results and increasing debt levels. While numerous attempts had been made to restructure, SAAG had met with limited success due to a failure to translate into implementation. He identified reasons of underperformance to include the lack of a coherent, integrated strategy; overt focus on cost reduction without adequately addressing operating model constraints; limited commercial and business skills to drive revenue growth; reduced customer focus; inability to attract and retain best talent in the market; poor implementation driven by a lack of communication; instability of management and breakdown of culture; and slow decision-making often due to increased management restrictions. Increased competition had resulted in a loss of market share and reduced yields.

Reporting on the turnaround implementation outcome, Mr Jarana said that SAAG faced a number of liquidity challenges and had identified mitigations and remedial actions. Liquidity challenges and risks included reduction in inflows, restricted cash access, difficulties with fund raising and poor domestic and regional GDP growth. On the other hand, mitigations and remedial actions included discussions with the shareholder, government guarantees, liquidity improvement and management and freeing up blocked and restricted cash. He noted the R10 billion Treasury cash injection in December 2017 that was used to service immediate debt obligations and working capital needs. Despite the cash injection, the financial position was already unsustainable and would become significantly worse without immediate intervention.

The 2017/18 budget and Long-Term Turnaround Strategy (LTTS) were premised on certain key assumptions and initiatives; some of these had however not materialised as planned. A number of quick wins had recently been implemented, to arrest immediate losses and start to turn around performance that had led to improvements in Revenue per Available Seat Kilometres (RASK), yield and average fare across the SAA network. They included capacity redistribution, route optimisation, staff costs, and organisation.

Mr Jarana underscored the strategy, implementation and strategic options. The SAA Change Agenda was driven by ten key strategic priorities. They were:
• Transformation of SAA into a commercially capable organisation whilst defending ita safety track record.
• “Flying for Profits”;
• Establishment of an efficient production and operating platform for SAA;
• Winning of the battle for premium and business traveller in the domestic market;
• Winning of the battle for price sensitive segment of the market in the domestic market;
• Becoming a focused and niche player in the international market leveraging alliances and partnerships;
• Growing scale in the regional market through organic growth and commercial partnerships plus SAATM;
• Developing aviation skills for the group and achieve workforce diversity in all occupational categories;
• Leading in customer experience management;
• Shaping the aviation policy in South Africa and Africa to defend SAA market and enable market growth;
• Strengthen balance sheet and address liquidity challenges.
• Plan leveraged, structured approach of 4 phases: arrest, change, stabilise and grow, with initial phase addressing immediate remedial actions.

Mr Jarana acknowledged that SAA was at risk. Limited management capacity to execute the strategy was a key risk to the implementation of the turnaround plan. Additional capacity to industrialise strategy implementation was therefore required at SAA. There were certain conditions and key dependencies for a successful turnaround strategy execution.

On governance, supply chain and audits, Mr Jarana stated that SAA had seen a significant increase in irregular, fruitless and wasteful expenditure compared to the 2016 fiscal year. In 2017, irregular expenditure was R125.9 million and fruitless and wasteful was R40.4 million. Irregular expenditure mainly resulted from delays in concluding contracts, whilst fruitless and wasteful expenditure was largely a result of late payments. The Board and management acknowledged the severity of the Auditor General findings and a detailed project plan is being implemented to address these findings.

On the Oversight Forum, Mr Jarana stated that the National Treasury as the shareholder of SAA and the SAA Board of Directors had decided to form a joint task force (the Oversight Forum) aimed at jointly finding solutions to the SAA funding challenges and creating an enabling environment for successful execution of the turn-around strategy at SAA. Both National Treasury and the SAA Board understand that an urgent solution had to be found to address SAA’s funding challenges. The Chairperson of the Oversight Forum was the Deputy Minister of Finance and the Deputy Chairperson will be an SAA Board Member. In the absence of the Chairperson, the Deputy Chairperson shall chair the Oversight Forum. Minuted resolutions of the Oversight Forum are binding on the parties, who undertake to implement their respective tasks within the agreed time frames. The meetings of the Oversight Forum take place bi-weekly (either in person or tele/videoconference) on dates predetermined by the Forum. Any amendments to the pre-determined dates would be after consultation with SAA and National Treasury representatives. The terms of reference were fourfold: determine the optimal capital structure for SAA; determine mechanisms to implement the optimal capital structure and funding model for SAA; define a work programme to plan and monitor the realisation of the objectives of the Oversight Forum, and design appropriate mechanisms to oversee and monitor the implementation of the turnaround strategy beyond the term of the Oversight Forum.

Discussion
The Chairperson welcomed an insightful report on the turnaround strategy. He asked Members to keep to two questions, in line with the resolution taken previously by the Committee.

Mr Paulsen said that he had a sense that Treasury was financing losses and inefficiencies. He asked if SAA was communicating with relevant stakeholders to expand the business. He commented that Telkom was well-advertised, well-structured, and financially sound and had a clear strategic vision. Why could the Telkom approach not be followed? SAA had a good a vision, but had financial instability and failed to retain the required talents and skills. Was there any consideration of listing SAA on the Stock Exchange? SAA had duplication of services. There should be no duplication of services.

Mr Shaik Emam said that SAA needed money to implement its strategy and the problem was SAA’s tendency of taking loans. If it were not a loan, would the money given to SAA be able to turn it to profitability? Or were there other contributing factors preventing SAA from being a profitable entity? He asked if Mango Airlines was profitable.

Mr Lees remarked that it was very interesting presentation. He asked what non-domestic airlines were operating in the domestic market. On debt limitations, SAA had R9.2 billion in debts and needed R12 billion to carry it to 2021. The injection had to be based on equity. Was there any provision regulating renewal of SAA fees? This should play an important role in the capital that was required by SAA. Leasing would have to be reviewed or reconsidered. Both the CEO and the Deputy Minister had stated that the cost of shutting down SAA would be R60 billion. In the presentation, an assessment of such an option was not clearly touched on. He therefore supported that the airline should be kept in the air.
 
Ms D Senokoanyane (ANC) said that it was clear that SAA had to be rescued. However, she remarked that the government guarantee never meant that the government would pay all the time. She asked how the CEO viewed cash injections and what would be its implications. Should it be continual? What were the persistent challenges? SAA had been rescued more than once. What guarantee would you give to the Committee that the cash injection would ensure that SAA would run on profit? What was the future of SAA? What did “interim resources” referred to in the presentation mean?

Ms Shope-Sithole said that she was trying to think of any business that sold its assets and did not put that money into its account. She was trying to understand what the main causes of the losses at SAA were. The main problem was the selling of SAA’s aircraft and then the leadership did not know where the money was. SAA was selling its aircraft and always the money disappeared. If one sold one’s asset, one would have this asset in cash.

Mr A McLaughlin (DA) remarked that it ought to be embarrassing to come here and tell Members that SAA was an entity run at a loss. They could not carry on like that. R40 million cash was injected in the business but produced nothing so what really happened? Could SAA management give members an assurance that SAA would be turned around?

Mr M Maswanganyi (ANC) remarked that there were agencies abroad selling tickets on behalf of SAA. There were serious restrictions on how the money generated could be transferred into the SAA account, resulting in these agencies keeping money. What was the position on transferring such money into SAA’s account? Could SAA indicate where it was in its collection of the money outside South Africa? Referring to the franchising contract, he remarked that it looked like the other party to the contract was benefiting from this contact; the contract was not working to the advantage of SAA. How did the contract work if SAA was losing local market and international market to Gulf Airlines? Why Air Rwanda and Air Ethiopia were, for example, coming on strong and aggressive? It looked like SAA would be in big trouble in 2021. The Committee was ready to support any turnaround strategy that would make things work. However, the main question was: why always were the turnaround strategies collapsing?

Mr N Gcwabaza (ANC) stated that SAA was giving the Committee hope and the Committee would support SAA management’s commitment and strategies aimed at turning around the entity. Last time the Committee asked about the non-strategic and non-productive SAA offices, in particular, the Miami office. It was unnecessary expenditure to have non-operational offices and management should comment on this. What amount of money would make SAA operational on a day to day basis and going forward?

The Chairperson asked how SAA departments would be capacitated and to provide a timeline for this. Capacitation should be time-bound. The Committee had invited Thabang Motsohi, an expert in aviation, to advise the Committee on how it would engage with SAA.

Organisational Strategist’s perspective on SAA
Mr Thabang Motsohi, Organisational Strategist, said he had made a presentation to the Committee on 17 November 2017, where he shared his perspective on this industry and gave a comprehensive historical review of the decisions taken since 1996. There were many airlines flying in the country. His presentation should be considered along with that of the 17 November. The presentation today would employ a different approach. It would be based on evaluation of what SAA was trying to achieve. In this presentation, he provided two options. The first option was for SAA to go into business rescue and restructure it aggressively. The second was to pursue an aggressive drive for efficiency optimisation at all levels while developing detailed answers to the question: What exactly must be done to make SAA ‘’fit for purpose’’ in all respects?

Mr Motsohi started with a quick review of the perspectives presented on 17 November 2017. He stated that the Coleman Andrews intervention was a success, albeit a limited one, because the deep cuts in labour costs that were necessary to make SAA competitive were resisted by organised labour. However, the gains that were made have regressed substantially in the past fifteen years and the state was yet again confronted with the urgent need to intervene to settle debt obligations and inject capital in favour of SAA. They had deferred their responsibility and obligations to ask difficult questions in 2002 and in subsequent years on the ‘’fit for purpose’’ question for SAA. They had failed to ensure that the boards since 2002 consisted of individuals with extensive and deep business experience and air transport competence and to ensure that the board was given oversight latitude without political interference. More critically, they had failed to ensure that management with both business and air transport experience was appointed to run the airline on a strictly commercial basis. SAA was therefore faced with the same challenges that made it necessary to bring in Coleman Andrews. SAA was technically insolvent then as it is today. However what we have now is catastrophic in proportion. The level of accumulated losses and the capital injection required raises very serious questions about the level of the opportunity cost that, given our economic situation and the increasing social challenges and obligations that confront us, has become morally impossible to defend and justify.

Mr Matsohi said that the real and fundamental question was: What ought to be done to make SAA ‘’fit for purpose’’? In responding to this question, he provided two options: (i) SAA ought to be put into business rescue and restructured aggressively. This provided a legally unchallengeable environment to do what was necessary. Under this option, all legacy agreements (including employment) were up for revision within the limited affordability. (ii) SAA needed to pursue an aggressive drive for efficiency optimisation at all levels while concurrently developing detailed answers to the question: What exactly must be done to make SAA ‘’fit for purpose’’ in all respects?

Mr Motsohi noted that in the light of the serious liquidity crisis that necessitated an urgent need to capitalize SAA by an amount of R10.25 billion in October 2017, the following decisions were taken by the shareholder:
- A new Board for SAA was appointed in November 2017.
- Implement urgent measures to stem losses and implement a turn-around strategy (LTTS)
- Vuyani Jarana was appointed the new CEO on 1 November 2017 and an airline turn-around strategist, Peter Davies, was appointed as Chief Restructuring Officer to oversee an operational restructuring and efficiency optimization.
- A high level Oversight Forum between SAA and Treasury was established to monitor the implementation of the turn-around strategy.
- The CEO has with effect from April engaged me as an external consultant for six months to advice him on development of the policy and regulatory sector including the LTTS outcomes. This was fortuitous because he had now had a much deeper insight into the LTTS.

Mr Matsohi said that the essence of strategy development was successful execution. Otherwise it remained a dream and a concept. He highlighted key factors that were critical for its success: A diagnosis of the operational and structural weaknesses ought to be accurately analysed and understood. There was a need to analyse and identify key challenges and constraints in the operating context, to develop a turn-around-strategy (maximum three months), to secure shareholder approval and alignment at all critical levels in the organization, to develop and document all key operational processes and their implications on the business model reorganization and funding and to develop a detailed framework for measuring intended outcomes and associated risks. He stressed that communication strategy was key and that an experienced team with executive authority had to be insourced to prepare an implementation plan with timelines and execute aggressively under a dedicated oversight authority.

Mr Matsohi underlined key success factors for airline management. The airline business was typically highly capital intensive and characterised by very thin profit margins. The principal contributor to turnover for any airline was the route network and how it was managed and optimised. Successful airlines, and indeed road transport companies, managed their traffic routes on the basis of profit and loss. In essence, all the critical cost and revenue drivers ought to be managed on a granular basis and optimised to achieve sustainable profitability per route. Evidence demonstrated that that was one area that, because of the lack of appropriate competencies and skills, was historically not well managed and has constituted a key weakness for SAA. The unavoidable conclusion was that a commercial culture and mind-set was sadly lacking in SAA. Clearly a dominant attitude was that SAA must provide a public service at all costs and the government should provide the required funds when needed. This was an attitude reminiscent of the days when SAA was a subsidiary of Transnet in the late 80s to early 90s. The role of Transnet treasury then was to secure and allocate funds. Traditionally the profitable entities like Portnet subsidised the under-performing ones like SAA.

Mr Matsohi suggested the key objectives of the LTTS and these were the SAA Change Agenda with its ten priorities.

Discussion
The Chairperson said that the information provided would help members to expand their knowledge base in order to engage with SAA. There would be no questions of clarity.

Mr Jarana responded to questions saying that there was a discussion happening with the Western Cape to see if there was a flight to Cape Town. On listing SAA, he responded that the Committee should look at the history of Telkom which was very different to that of SAA and stated that the oversight of SAA should focus on how SAA was being funded. There was a mix of funding. It was a long journey to get where Telkom was.

On the duplication of services, he responded that having two airlines did not contribute to the shortage of skills. The sacrificing of one airline would not contribute to the recovery of SAA. On whether money was given could SAA be turned around within a year, he responded that money was crucial because a business could not run without money. A strategy could not run without money. It ought to be noted that there were some structural problems that needed to be addressed, including modernising the supply chain management and rebuilding the culture of commercial focus. These things took time. Clearly, problems were not limited to finances only. A new route took 24 months to move smoothly. There was a need to market the product and retain good skills in order to turn it around.

He agreed that although SAA and Mango was using the same routes, Mango Airline was benefiting and this depended on its different business model. It was around commercial delivery. It was about cutting costs. It applied mixed models. It was all about the culture.

On what non-domestic airlines were operating in South Africa, he responded that the Turkish, Qatar, and Ethiopian Airlines went local. SAA applied a hub strategy which focussed on managing international flights. The Turkish, Qatar, and Ethiopian Airlines could land in Johannesburg and still go to Durban or Cape Town. This had an impact on domestic flights. They took away opportunities from the local airlines. SAA management would ensure that SAA takes more flight and more hours. They were reviewing the flights of SAA and were committed to do that.

Mr Jarana stated that the cash injection underpinned recovery in the five year plan. If they got money they would be able to cover their daily costs. There were environmental issues that needed to be taken into consideration such as when the petrol went high, it had an impact on operations. There were also existing contracts which could not be interrupted. On the interim resources, this was used to cover legal costs. For example, they had to find someone who should close the gap and who should deal with the court. They avoided suffering from this gap and a good candidate should be found. On the money that was withheld outside, these were funds restricted in foreign countries because they were in foreign currencies. In Angola, there was US$41.8 million, US$4.3 in Nigeria, and US$43 million. All the money to be transferred to South Africa was around US$90 million. On franchising, he responded that the franchising model was applied to the airlines that could land at small airports.

The Chairperson said that they would continue to monitor SAA and hoped that the National Treasury had taken important note. He thanked the Board and the entire delegation for their time.

South African Post Office (SAPO) briefing
Mr Mark Barnes, SAPO CEO, focused on the allocation of the funding recap, feedback on the Committee’s recommendations, achievements and challenges in its turnaround, strategic plan overview, implementation plan risks, SAPO’s future context and its public service mandate.

In his introduction, Mr Barnes stated that SAPO, as it was at the time structured, managed and funded, was not financially sustainable. It had regressed so far technologically, that it simply could not offer a competitive service. It would need to invest, not only in technology, but in its basic customer interfaces, in order to compete on the frontline. The possibility of partnerships or joint ventures with established players was seen as an alternative to organic growth. Postbank had always been central to the diversified revenue strategy of SAPO, with the expectation that it could contribute up to a third of total revenue once earnings from lending become a reality. If SAPO did not initially get government business to help it fund its cost base and required investment in upgrades and growth, SAPO would continue to require direct government subsidies. It could become an investible entity which can attract its own capital and deliver reasonable returns to government.

Mr Barnes said that R3.7 billion recapitalisation funding had been received from National Treasury on 29 December 2017 and utilised to repay the R3.7 billion term loans which had been settled on 12 January 2018. The repayment of these term loans would result in monthly debt cost savings of R24 million. SAPO had a stronger group balance sheet position as at 31 March 2018. It had preliminary equity of R 3.8 billion in share capital and reserves. A new term loan facility of R400 million had however been secured in December 2017, with commercial banks to assist SAPO with working capital to partially repay creditors backlogs.

Mr Barnes said that SAPO took into consideration the Committee’s recommendations, including reporting to the Monitoring Task Team (MTT), retention of critical skills and ensuring consequence management. SAPO continued to report to the MTT on a monthly basis and to the Department of Telecommunications and Postal Services (DTPS) on a quarterly basis. With regard to critical skills, the psychometric assessments had been conducted and the feedback was received on 17 January 2018. The Minister’s Office was informed on the recommendations. However, the fit and proper process was yet to be done. On consequence management, 1 048 cases of misconduct for absenteeism, gross negligence, dishonest acts, gross insubordination and non-compliance, were dealt with the past financial year. As a result, 189 employees have been dismissed during the year.

Mr Barnes reported on key achievements in the turnaround strategy. In restoration and stabilisation of the operating and labour environment, SAPO consistently performed above 85% of the mail delivery standard and peaked to 91% at 31 March 2018. It signed new recognition agreements with labour – jointly with two unions: South African Postal Workers Union (SAPWU) and Democratic Postal and Communications Union (DEPACU) on 2 February 2018. In terms of the roll-out of key government projects, the SASSA roll-out was in progress, with new SASSA bank cards issued. Moreover, the Digital Terrestrial Television (DTT) rollout had been successful with a total of 686 150 qualifying applicants registered to date. 356 402 set-top box (STB) kits had been issued by 31 March 2018.

Mr Barnes said that the turnaround strategy faced huge challenges. The strategy had never been sufficiently funded. Rather, funding had always addressed historical issues and not investment requirements for growth. SAPO suffered from insufficient working capital and from the fixed cost base, which continued to exceed revenues, in part due to the unfunded public sector mandate that costs SAPO over R 700 million per annum.

Mr Barnes said that, with a mind to secure a banking licence, a Section 13 Approval to Establish a Bank was granted by the South Africa Reserve Bank in July 2016 and Postbank SOC Limited had been registered. Six Postbank Board nominees had been approved by the South Africa Reserve Bank as “fit and proper.”

On funding the public service mandate, Mr Barnes stated that from its corporatisation in 1991 SAPO received a subsidy for the fulfilment of the public service mandate imposed on it by the Postal Services Act. From 2002, SAPO received just over R300 million per annum in subsidy, which stopped being given to SAPO in 2012. The subsidy was used to expand branches into areas where commercial postal operations were not viable. By the end of 2016, this amounted to over 600 branches that are not commercially viable, but nonetheless have been funded by SAPO. SAPO now incurred an annual cost of around R700 million in fulfilment of the public service mandate. It did not receive a subsidy for incurring this cost, which was purely a public service and was not a commercially sustainable undertaking. The lack of subsidy was contributing to the ongoing financial challenges facing SAPO.

As a way forward, Mr Barnes said that there was a need for partnerships, legislative changes and sufficient funding. It was important to find the correct technical partnerships that would enable SAPO to grow and diversify its revenues without needing to invest directly in infrastructure. In this regard, SAPO would look to partner with organisations that had technical solutions and products that it could leverage off of, for example products and technologies that SAPO could white label. He believed that partnerships would be crucial in allowing SAPO to close its investment gap and be able to provide competitive offerings in banking and e-commerce. Changes in the existing legislation should be made to allow external investors into SAPO and to exempt SAPO from PFMA compliance for revenue-generating initiatives. There was a need to change the funding model, by inviting capital partners and raising debt/equity capital in the private sector. This would reduce SAPO’s reliance on National Treasury for funding.

Discussion
Ms Shope-Sithole said that should like to know who was dealing with securing the banking licence.

Mr Paulsen welcomed the presentation and remarked that today services were highly dependent on technology and asked what SAPO was doing to ensure that the technology was solid. For example, many clients of SAA were making bookings online. He asked what SAPO was doing to ensure its collaboration with other entities and what was management doing to give the organisation the possibility of running in the future? He asked what SAPO was doing in empowering its employees to provide modern technological services.

Ms M Manana (ANC) asked about labour brokers. She had visited Bethlehem and people were complaining about labour brokers. They said it was no good for them. Why did it take SAPO six months to deal with the matter? She wanted to know more about the bank within SAPO.

Ms Sonokoanyane wanted SAPO to elaborate more on the turnaround strategy and legislative review and how the revenue could be generated and why SAPO should be exempted from PFMA compliance.

The Chairperson asked if it could be confirmed that aspects of the capitalisation had been met.

Mr Barnes responded that there was difference between the Companies Act and SAPO Act. According to the latter, SAPO was a State Owned Company and was not a public company in terms of the former. In banking legislation, SAPO was a public company. There was a provision in the Companies Act that elaborated on this. A bank needed to have a controlling company. SAPO was controlling a bank even if SAPO was not a banking company per se. SAPO was not operating like a bank even if it was acting like a bank. That was why they had to develop an alternative structure. In terms of technology upgrades, SAPO had approved a R9 million project for upgrading technology. Technology was a challenge because it was not up-to-date. The problem was that SAPO had old scanning machines which could not capture numbers well. It was costing SAPO a lot in reconciling numbers. Upgrading was going to make them sufficient and competitive. SAPO needed a huge cash injection in order to address the technological problems.

On staffing, they were not looking at rationalising but looking at redefining what constituted employment complacent. On labour broking, he responded that labour brokers worked on the basis of corruption. Labour brokers were corrupt. SAPO was not recruiting through labour brokers. Its workers were permanent and they had their own workers. SAPO was in a situation of insolvency but it was talking to National Treasury to see how it could get out of the situation.

Ms Manana said that R10 million was brokered. She was glad about the responses given and said that the labour brokering should be taken seriously by the Committee.

The Chairperson thanked the SAPO delegation and said that Members would support infrastructure and licences. National Treasury was present and hoped Treasury had taken note.

The meeting was adjourned.