South African Post Office on its 2016 Strategic & Annual Performance Plan

Meeting report

South African Post Office 2015 Strategic & Annual Performance Plan (APP) briefing
Mr Mark Barnes, Chief Executive Officer, South African Post Office, noted that the Post Office (or SAPO) was in the process of reviewing its overall property strategy, and its approach to the disposal of all its properties. The review would determine how SAPO would deal with offers that already had been received and any future offers.

Speaking to the SAPO plans for revenue growth, he said that in the public sector, SAPO's focus would be on generating growth from servicing government. However, because of the organisation's historical bad creditor behaviour, securing contracts with departments was a challenge.

SAPO was a socio-economic entity, with a social purpose, and it still subscribed to this. Its social purpose/ footprint could be used to implement services to South Africans that went beyond money and post: for example, delivery of chronic medicines. The Gauteng Government had started engaging with the private sector again to look into the delivery of chronic medicines.

Mr Barnes conceded that the timing of his arrival at SAPO had been bad, in that it was after the budget had been finalised. If SAPO was not able to secure the capital equity injections as presented, it would be unable to service all of its debt.

He noted that one of the outstanding matters at SAPO was that there were no performance management systems within the entity, from the CEO position downwards, and the reason was that the management was not certain enough about SAPO’s anticipated future to contract with people on their performance incentives could be. He did not anticipate SAPO having performance driven contracts for at least three months into the future. SAPO also had not filled the Chief Financial Officer (CFO) and Chief Operations Officer (COO) positions which were requirements according to SAPO's establishing Act. Again it was very difficult to retain or recruit high calibre people unless there was certainty within the normal constraints of business challenges.

Mr Barnes said that the executive would be tabling a proposal to settle all labour obligations to SAPO's board in respect of past obligations and future commitments. That would include elements like a guaranteed increase in the first year, which would be put into a separate account from the SAPO account. Mr Barnes had started engaging with the Unions to start seeing Union members as SAPO's employees with a common cause.

One of the debates in engagements with banks, on securing additional funding for SAPO, was the value of a Government guarantee. If banks in SA were not prepared to lend against Government guarantees then they were not supposed to take Government deposits.

He said that 25 of SAPO's branches had closed because of lack of money to pay the rent. It was SAPO's hope that it could do a Union consortium agreement so that it had one interface with the Unions in the future. The executive had its first serious strategic session about revenue generation on 6 April. It was looking into how it would go about getting back the parcels business, which companies it could get, and what would be the approach to compete with DHL. There were 394 sales personnel at SAPO that had not been able to think about sales for at least a year because they could not even get through the front door trying to sell SAPO's offerings. SAPO had not shed any jobs as a consequence of its bad creditor behaviour because it had rationalised and redeployed them around itself.

Mr Barnes said the corporate strategic plan was supported by an implementation plan that the executive had worked on. There had been more participation and distillation in producing the document by the executive. It had introduced lots of benchmarks – such as looking to market prices. It had engaged in a very involved decision making process.

Key Performance Indicators
He then outlined the key performance indicators as follows:
-Expand Post Box User Base
Mr Barnes said that it was quite difficult currently to persuade an individual to open a post box. There were currently about 2 million un-utilised post boxes which was a potential revenue of R60 million annually. Those in use had not always been paid up to date.

Achieve Base Case Revenue
SAPO understood that traditional mail was a declining business, but hybrid mail was the substitute where a letter could be e-mailed and then printed locally, particularly in rural areas. He pointed out that even some banking institutions still had savings books.

Cost Management
Mr Barnes said that he was well aware that currently, SAPO certainly had to cut its cloth according to its revenue capabilities. Although SAPO's current strategy was not a cost driven forward strategy, it was a growth forward driven one and things like the voluntary severance and early retirement and the change in the revenue mix were going to change SAPO's cost mix. 

In relation to strategic stream 3, SAPO had to improve its efficiencies, which involved elements like technology spend and Information Technology (IT). For example, if PostBank really wanted to become a fully fledged bank there was quite a lot of capital expenditure that needed to go into upgrading its electronic interface with its deposit receivers.

In terms of SAPO being a high performance organisation Mr Barnes said that the organisation had to stand on solid ground before reaching for the stars.

Discussion
Mr C Mackenzie (DA) said he sensed Mr Barnes. frustration when saying that banks should not be taking government deposits if they thought that government guarantees were not good enough. It was noteworthy that SAPO's Strategic Plan (SP) had been produced on normal print paper without going into additional costs for any other typesetting, but he commented that he thought the plan was very broad, and there were many assumptions and multiple variables which made the plan almost impossible to interrogate when it was neither precise nor in-depth.

Mr Barnes had alluded to why the strategic turnaround strategy attempted by the Chairperson, Dr Simosezwe Lushaba, had not worked, in the appendices. There had been many assumptions, such as that SAPO would turn-around its R200 million losses for the financial year under review, so that 2016/17 would generate a profit of R1.2 billion. Mr Barnes had just rolled that projection out by a year to 2017/18 with the losses becoming much greater. Mr Mackenzie said that he believed that both plans unfortunately lacked credibility.

Mr Mackenzie had welcomed the report from the Public Protector. It was, however, noteworthy that the former CEO, Mr Christopher Hlekane and former Chief Financial Officer, Mr Khumo Mzozoyana, had resigned just before their disciplinary enquiries were due to be finalised. It was under their and other directors’ watch that the SAPO sank into the “black hole” that it was currently in. Mr Mackenzie had laid criminal charges under the Companies Act against all those directors in October 2015 , but he had heard very little commitment or emphasis from SAPO on actually holding someone accountable for the issues. He wanted comment now from the current CEO and Board Chairperson, and an assurance that every possible legal action would be pursued against the parties responsible for SAPO's current situation. 

There had also been a reference to a Special Investigating Unit (SIU) report which the Committee had not seen; and he asked if SAPO could indicate when the Committee could expect to see that report?

Mr Mackenzie asked, in terms of operational oversight, what SAPO had done to address the Auditor-General South Africa (AGSA) findings on financial controls at the organisation, and how far had it gone on that point.

Mr Mackenzie commented that he found Mr Barnes' comment about SA banks almost offensive. He saw the country’s banking system as something to be proud of, if regard was had to the crisis of 2008 and how the country had been able to weather that storm relatively unscathed as a result of its banking sector. The main reason was that tight financial controls were in place, which was probably the reason the PostBank had not been given the license it had been asking for, some years bank. He believed that the problem lay not with the banking sector, but with SAPO's business. The banks were obviously looking for some kind of assurance that they would get their money back if they lent SAPO money. In addition to the R650 million bailout that SAPO would receive, in the week starting 18 April 2016, it was also looking for another R1.35 billion in the years 2016/17 and 2017/18. SAPO's current losses of R125 million a month were without any revenue from the PostBank. If SAPO took PostBank’s revenue and added that up, then how much was PostBank losing?

Mr Mackenzie also asked at what point, in SAPO's projections between 1 April 2017 and 31 March 2018, would the organisation begin to break even? In the financial year ending 31 March 2017, it was supposed to be possible to see a favourable trend emerging which would show that SAPO was on the road to recovery, but he wanted to know when that trend was likely to show, and when the loss would start to lessen.

Mr E Siwela (ANC) noted that Mr Barnes did not sound convinced that SAPO would get its R2.7 billion capital injection, despite Government guarantees. He asked what would happen if indeed the cash injection never materialised.

Mr Siwela also noted that SAPO was saying that the Public Finance Management Act (PFMA) was making it difficult for it to compete effectively. However, he had understood that Act as promoting accountability and transparency and wanted further comment on how it was allegedly hindering the organisation.

Mr Siwela also noted that SAPO's targets seemed to have decreased from the previous financial year and the reasons for that were unclear. He asked if it was because it had not been able to achieve the targets.

Ms M Shinn (DA) recalled that SAPO had said it needed money from NT within the next month, or it would have to close its doors. She asked how much it needed immediately, and where it thought National Treasury would be able to source the funding. She assumed that SAPO's  three priorities were a resumption of its universal service obligation (USO) payments (to its creditors), the staff payments for early retirement and voluntary severance. However, since SAPO was Government owned it was subject to the PFMA. She asked if this did not pose an inherent contradiction in making business from government entities. Mr Barnes was not able to compete with a managing director elsewhere, in making decisions on a turn-around, because he had to go through a protracted legal process. She asked if that implied, if SAPO was supposed to be competitive according to its vision, that SAPO should be privatised with the license conditions of universal service. 

Ms Shinn asked if SAPO had been paying its license fee to the Independent Communications Authority of South Africa (ICASA) in the recent past and she asked the figure of that annual fee.

Ms D Tsotetsi (ANC) asked how much interest SAPO had accumulated on overdue creditors’ payments to date. She also wanted to know what conditions banks were attaching to loans to SAPO. She said it was commendable that the executive and management of SAPO were working without incentives, but there needed to be some certainty about what the scenario would be if the organisation managed to raise sufficient funding. Would the management receive back-pay, or would they receive anything from what had been raised.

Ms J Kilian (ANC) asked whether SAPO had another plan, if the money it had requested never came from National Treasury (NT). Mr Barnes had referred to engagements with banks. She wanted to know how much SAPO had raised from those engagements to date. She asked if government might have to provide  bridging finance from the fiscus for SAPO?

Ms Kilian made the point that SAPO had a remarkable footprint, as set out on page 7 of the presentation, and the reference to possible privatisation of SAPO had to be seen in light of what the Committee knew about the events in the mobile services industry. There was an oversupply in the more profitable areas but the private sector did not go into the remote areas where there was need for services. Previously,  SAPO had indicated that some of the rural post offices were quite profitable, though they were small. She wondered if SAPO considered a shared facilities model with other state institutions, to reduce costs. What was the current footprint of SAPO's competitors?

Ms Kilian then asked if the SAPO projections on its Group Financial Performance and the key assumptions were showing a realistic position, from making losses in 2015/16 and 2016/17, to starting to general profit in 2017/18.

She noted that SAPO had indicated that it had been a mistake to phase out the Universal Service Obligation (USO) funding from Government and that should be returned, and wondered if it would have to “close shop” if that did not happen. She also asked if this would be a make or break situation for the PostBank?

Ms Kilian also wanted to know what had been at the root of the continued engagements with ICASA to conclude reserved postal services complaints that had been lodged.

Ms Kilian was surprised that the performance contracts of executives and management were not in place as that was a key requirement of the PFMA and NT regulations, and wondered if that was another historically poorly-managed problem.

Ms Kilian noted that the SAPO Group Income Statement listed increases in respect of revenue for all items on page 37. She wanted to know the underlying assumptions for those increases, compared to the previous financial year.

Ms N Ndongeni (ANC) asked for the total number of SAPO's employees, and whether that organisation had any contracts with government departments, and if so, how many? She asked if SAPO had any plan to move from its current building to its own building, and whether this would result in a cost reduction. She asked if it had sorted out the challenge of mail being undelivered to the Eastern Cape post offices.

Ms L Maseko (ANC) recalled that SAPO staff had received partial salaries late in 2015, asked if SAPO had since paid up those partial payments. She asked if the Unions were in support of rationalisation of staff by SAPO? She commented that indeed even e-commerce would not be able to replace the service offerings of SAPO. She wanted to know how far SAPO had actually reached in rationalising its property portfolio.

The Chairperson said she noted the differences between the previous Strategic Plan and the revised one now before the Committee. She asked what had prompted the shift on the turn-around strategy, and said that she needed to be reassured on SAPO's commitment that in three years time, it would have turned a corner and that this would not merely be another promise similar to the one that the organisation would be generating a profit by next year.

She asked how SAPO planned to reduce staff costs through voluntary severance and early retirement in the 2016/17 and 2017/18 years. Although Mr Barnes had alluded to constant interactions between himself and SAPO labour unions, it had to be noted that on the 14 April the Communication Workers Union (CWU) had been protesting about a similar approach by Telkom. She also asked how SAPO anticipating was implementing its cost management strategy, given that the CWU had previously held SAPO to ransom.

The Chairperson said that the Committee had previously heard that the Courier Freight Group (CFG) was a loss making area, which had prompted a review, as it was competing with SAPO's logistics unit. She asked for progress reports on that.

She noted that PostBank had not received any capital injection from the current appropriation, and asked what the impact was on PostBank’s recapitalisation, after the diversion of funding to SAPO alone. She asked if this meant that SAPO was anticipating delays in the full corporatisation of PostBank.

Mr Barnes accepted that indeed his comments regarding banks had been offensive, and that he was withdrawing those remarks unreservedly.

Dr Simo Lushaba, Board Chairperson, SAPO, referred the Committees to appendices A, B and C in the presentation, which included what had been in the Strategic Turnaround Projects (STP) previously, which the organisation was still pursuing in the corporate plan, and what had been introduced later in the corporate plan. For example, later additions included the ISO certification and funding for USO obligations. SAPO had not dropped any projects. However, some of the revenue generating and cost saving projects that needed capital could not be implemented, as SAPO had not been able to access the required funding. In September 2015 SAPO had first submitted a request with motivation for R3.4 billion funding. The R1.2 billion to which the Chairperson had alluded was indeed supposed to be used for the turnaround. However, with the supplier actions, the SAPO revenues continued to decline. He reminded the Committee that this issue had been discussed during the Committee’s oversight of the organisation in October 2015, at a time when SAPO found itself unable to pay employees. SAPO had then taken the R1 billion loans from the banks, to top up its employees’ salaries. Within a week of the partial payments, the full salaries were indeed paid, from that loan. The loan had originally been planned to be used as part of the turnaround.  Now, therefore, SAPO was continuing with almost all the projects that had been in the STP, although at a slower pace. The assumption had been that the banks' funding would capitalise all the revenue generating projects. As Mr Barnes had cautioned, if SAPO was unable to source the required funding in full, this would indeed compromise the entire plan as presented to the Committee, making it not able to be implemented. He emphasised that the “fixing” of SAPO would depended on whether this organisation was able to access the required capital in full. If that could not happen, then the “hole” would grow and SAPO would have to revise its Strategic Plan each time it came to the Committee, according to what was in place at any particular time. That was why Mr Barnes had also said that SAPO's ship should not set sail with a half-fixed hole.

He spoke to Appendix C. The Committee would note that there were three projects that had been in the STP, which were not in the current SAPO Strategic Plan (SP). This was because they were not feasible. SAPO had gone out to tender on all of them, with government, but had lost out to competitors. The reason was that the state departments had not been forthcoming in supporting SAPO.

In regard to the properties, Dr Lushaba noted that the executive had, in the STP, put in a request to sell 99 properties. However, SAPO did not have the money to get them evaluated at the time. This would be done under the current SP. That was the reason behind re-basing the STP. He wanted to emphasise that SAPO was not totally digressing to a new platform that had never been in the STP.  SAPO was facing a situation which was sub-optimal in terms of the funding that it had anticipated and that did not materialise, and therefore the rate at which SAPO could change and reprioritise the projects was slightly different. This meant that it would take longer for SAPO to turn the corner to recovery.

Mr Barnes made the point that, at the moment, SAPO was not in a position to make any disclosure on historical accountability as relating to the former CEO, the former CFO, the Public Protector or the SIU reports.

Dr Lushaba interjected that he would like the Chairperson's assistance on that point. Another Committee had asked about the SIU report. Legally, the procedure was that SIU reports went to the President . When the President shared that report with SAPO, he would, as usual practice, instruct that the contents of the report should be kept private between SAPO and the Presidency. Anyone wanting access to such a report would have to submit a written request to the Presidency.

The Chairperson agreed that the SIU report had not been made public and she would request it from the Presidency.

Mr Barnes said that SAPO did take historical accountability seriously, and the executive was up to date with the instructions of the Public Protector (PP) and had agreed to become co-applicants in any court action that could arise in respect of the SIU report. There was not much that could be done about civil action in respect of negligent behaviour by the previous management, once the management had resigned.

In terms of operational controls SAPO had tried to introduce some tests that had to be replied to, or proposals put forward by the Executive Committee (EXCO). One of the tests was asking what the market price for a particular service was: and that meant that SAPO had to assess itself on whether SAPO was a compliant, financially astute and competitive organisation if proper market tests were applied to every decision that was made. Such an approach should also eliminate or curb fruitless and wasteful expenditure. For example, two properties ere about to be sold, but the executive had rethought that, and assessed that SAPO could get much more if these tests were properly applied.

Mr Barnes said that SAPO could appreciate that the banks, in the national interest, should see government guarantees as valid documents against which they could advance funds to the organisation. It would be incongruous for a government to deposit money into banks if the banks were not prepared to advance money against the same government's sovereign guarantees, as that would result in a substantial down-rating of the country. From the point of view of attitudes, however, the banks had become more positive towards SAPO, after SAPO had also presented its strategic plans to the banks, as shown by the fact that one bank that had originally withdrawn SAPO's loan and overdraft facility had reinstated that facility, and increased its exposure from R270 million to R1 billion.

In regard to the revenue of PostBank, Mr Barnes said that the revenue had been about R223 million in the 2014/15 financial year, and that this was entirely interest revenue. He said the PostBank had R7.2 billion in cash deposits where only it had made the revenue  alluded to. The PostBank, from a financial risk exposure perspective, had no risk.

Mr Barnes said that the projection was that in the third quarter of the 2017/18 financial year, SAPO should start breaking even. He had extraordinary detail on that, month by month, as that was required when producing the implementation plans.

He then commented on alternatives, should the R2.7 billion funding not materialise. The executive was trying to get a common term sheet for all of the banks it had engaged with, so that all their conditions were the same. Three of the four major banks had bought in, on the basis that they would not want to be exposed at more than 25%, so that exposure would be a group lending function.

As far as the numbers were concerned, he said that everyone shared the same trust deficit towards SAPO, where it was very difficult for the executive to persuade the banks that SAPO's numbers were resilient to get buy in. There were too many contingencies in its SP. For example Mr Barnes had been at SAPO for only three months. The organisation still had not received any money. Only eight hours into his first day with SAPO he had to write his first letter to the Minister about funding. On 15 January 2016 he had also sent his first letter to NT, saying that SAPO needed a certain amount to keep its doors open for the following month. Each month that the NT was not transferring the money, SAPO fell another R125 million into debt. To date, the debt was R375 million, and creditor interest was also ensuing. That meant the rate of destruction was rapid if this was allowed to happen. Another issue that banks had towards SAPO was that they were competitive. The conundrum was that if SAPO succeeded it would take market share from banks, and for this reason they were not entirely supportive of SAPO. For instance, the last thing Capitec wanted was that PostBank should be successful.

Mr Barnes addressed the question what might happen if SAPO did not get the capital or the equity capital it needed. He had resisted to SAPO being committed to starting the journey – hence his comment about the ship leaving the harbour – if it had less than it needed. It would be a fool's paradise ,if SAPO thought that having half the money would get it half along the way. Without the money, SAPO would actually go nowhere. It had thought about whether to seek funding internationally, but the due diligence and exposure would take too long and be too risky. SAPO did anticipate that in three years time it would be able to issue its own post office bonds, which had been very popular in the past.

Mr Barnes noted the queries on the PFMA. There was precedent for an exemption from the PFMA and possibly Ms Shinn was right that SAPO could operate within the private sector. However, privatisation was not on Government’s agenda, and until it was, Mr Barnes could not speak to that.

SAPO was not refusing oversight but the main point driving its responsible actions was not oversight, but good business. For instance, the weight of equity funding would be greater on Mr Barnes than the weight of oversight. SAPO would live with the PFMA. SARS had received an exemption from the PFMA when the current Minister of Finance had gone into SARS to fix the institution. He said that not only were there delays in timing when it came into being competitive, there was also an exposure of intent, because every time that SAPO put out a tender that it wanted a specific service in a particular region at a particular cost , that was essentially displaying SAPO's competitive advantage in the public domain. There was no other business in the world that was operating competitively that still had to publish its forward strategy. However, every time SAPO wanted to buy a computer in place A or open a branch in place B, its competitors would get wind of that six months in advance. SAPO had to operate much faster on the oversight aspects.

Dr Lushaba spoke to the process of early retirement and voluntary severance packages. SAPO would allow its employees to take a package and pay for the separation, to reduce its ongoing costs. That would cost SAPO R370 million, but that had to be compared against the savings of R60 million that it would make by doing this. SAPO had not done that for eight months. It had actually paid out R480 in R60 million tranches; something that could have cost SAPO R370 million eight months ago was now estimated to cost R470 million and that was increasing by R60 million for every month that it delayed. That was the main hole in the equation. This same difficulty applied to all cost savings measures. If the organisation could not find ways to reduce costs once and for all it was stuck in a situation; for instance, it was paying high maintenance bills on old vehicles because if did not have the capital to buy new cars, even though the costs of these had not risen substantially over the last eight months. Another example was that it had run out of ink for the printers, and not putting replacement ink in for three or four months meant that the print heads would then calcify, and print heads had to be replaced from France,

Mr Barnes said that SAPO had run out of ink on all of its printers just to illustrate the challenges they were facing. Not putting ink into a printer for three or four months, the print head would calcify and print heads were made in France when having to be replaced.

Mr Barnes made the point that the executive of SAPO would not be here in Parliament asking for money, if it did not believe that there was a future for SAPO and it would not be defending the need to plug the funding deficit merely for the sake of doing so.

Mr Barnes said that the ICASA license fee was R17 million and SAPO had not paid it. That was both because of the money shortage, and the loopholes in the Act where reserved areas were no longer reserved. For example, packages of under 1kg had been reserved for SAPO unless SAPO could not do it. Banks were not really allowed to send out their credit cards via couriers, but should use SAPO. The executive had originally engaged with ICASA in defence, but there was now more of a partner-type engagement.

There was little interest in the creditor summary, and SAPO had not accrued any interest in terms of overdue amounts. The suppliers of SAPO had been resiliently tolerant. Some had been waiting a year for their payments and relied on the fact that SAPO was a state entity and they would be paid eventually. Those relationships were deteriorating, not because of lack of goodwill but because supplier business were going bankrupt.

SAPO knew that performance incentives were a requirement of the Act but it had been really talking to future performance contracts because there performance contracts in respect of the key executives currently. Those that Mr Barnes had not signed off on were for the CEO, CFO and COO, and they would be reinstated once SAPO was ready to proceed as outlined above.

Ms Dawn Marole, Non-Executive Director, SAPO Board, said that the HR Subcommittee of the Board  was aware of the PFMA requirements, and also understood that someone had to be responsible, and be furnished with the right resources to deliver. The HR Subcommittee found itself in a difficult position,  because the expectation was that management must deliver, although it was known that management did not have the basic tools for delivery. The HR Subcommittee decided to solidify the detailed deliverables behind the corporate plan, and help the CEO thus to have a concrete performance contract so that he could then roll it out to other executives, to roll down in turn to senior management. Management was asked to complete those plans in the next three months, break them down into deliverable chunks, and ensure that there were “warm bodies delivering specific targets”. Those contracts had to be in place by the end of June 2016. The Subcommittee would want to see the top 70, so that it would be confident that issues of revenue, cost cutting and all other commitments in the corporate plan would be incorporated in the performance management contracts.

Mr Barnes said that smaller post offices in rural areas continued indeed to be profitable because the overheads structure there was much slower. SAPO's Sandton Mall post office was unjustifiably expensive because of the location and that was part of the organisation's rationalisation of its property strategy. Possibly the organisation could sell some of its properties, as that could be a source of funding, but that would not just be done without context and understanding of what the property strategy was. For example; there was a building in Kalk Bay that had become an African curio shop that had originally been a post office, and that had been sold for about R1 million. There was also the unoccupied heritage building in Church Square that belonged to SAPO. SAPO could end-up in a world where it did not feel the need to have any owned properties; alternatively that could be of strategic advantage commercially.

There was an opportunity on shared facilities and the Department of Home Affairs  (DHA) was re-looking at its initiative for identity documents (IDs) where banks could currently issue IDs and SAPO could not. DHA had 407 offices nationally whereas SAPO had 4 000 points of representation nationally; therefore it could make DHA queues ten times shorter if used. It also had an authentication capability and by law some of SAPO's capabilities were entrenched – such as the ability to deliver registered post.

SAPO was in a wait and see position in relation to ECO Point as it was a matter of legal action. The Public Protector sought to make that contract invalid in law and the decision on that would have a substantial impact on moving out or staying at that property. The SAPO board would, at its next meeting, be presented with the total cost of moving back to Pretoria. The organisation had sent ECO Point a final letter of demand for the recovery of the R22 million over-payment and summons would be delivered in the week of 18 April 2016.

In Mr Barnes understanding, SAPO's competitors had temporary footprints in that they had gone into places in terms of leasing properties driven by expediency of the business that SAPO was no longer competitive in. Some of the competitors had now approached SAPO for joint ventures. 

Mr Barnes emphasised that on the turnaround, SAPO said that it would not be profitable within a year, but within two years, the 2018 financial year. That was also quite conservative, because Mr Barnes said that that the break-even point could be made the base case.

SAPO did not have any Government contracts that could really assist..

Dr Lushaba expanded on that. The only government contracts would be things like  ID cards and the social grants payments, but that was not sufficient to help SAPO because banks were getting the business and SAPO would go borrow from them. The cost of borrowing over three years was over R1 billion, although it would certainly have helped had SAPO been able to get the work.

Mr Barnes continued that SAPO certainly still had homework to do on the USO, where the organisation had not done a proper scientific study of exactly what had been the losses incurred because of the USO. That did not mean that SAPO had to always receive a subsidy, because there were other ways the organisation could work with the Government to try and solve its economic challenges.

SAPO would keep fighting until it received the money, because suppliers had come to Mr Barnes with a very soft approach to say that even if they were paid in part, they would continue to work with SAPO. He had been able to give them nothing and three months later his speeches had lost currency. In all, SAPO's revenue was down from about R6.2 billion to R4.7 billion and two thirds of that was mail revenue, which was projected to grow at 3% over the next three years, thus a very low base from its traditional business.      
He noted that there were 21 617 employees, and this did not discriminate between casual and permanent employees.

Mr Morale added that these numbers were for 2015, and the executive was still awaiting current numbers from the HR Department, as there had been some attrition. They also wanted a breakdown on what skills sets had been lost.

The Chairperson asked whether that number was before or after the termination of contracts for postal agents, and Mr Morale confirmed it was after that.

Mr Barnes said that SAPO's board was not overpaid as it was quite involved in the work of the organisation, given the nature of the turnaround facing the entity.

Mr Barnes felt that SAPO would probably not be moving offices, apart from the need to resolve the PP s report and remedial action recommendations, as it simply did not have the money to move just yet.

He confirmed that there was a mail delivery backlog and SAPO met every Friday morning at its national control centre and except for some regions the organisation was at 85% to 95% of its delivery targets. In the very bad areas it was down to 50% to 60% of those delivery targets.

In Eastern Cape, SAPO was using independent delivery agents, whom it had not yet paid. He had once received a call saying that SAPO was throwing post on the road, but had found out it did not happen on purpose, because one of the delivery agents had had an accident.

He said that the unions understood, on rationalisation, that SAPO's first prize would be a growth strategy which would not require rationalisation. However, it would be made clear in the contract for settlement agreements, that unless SAPO made the revenue targets it required then it could not continue with the costs. SAPO would put it to Unions individually and collectively that that was what it was committing to settle retrospectively, and in future it would commit to undertake things only if there was performance in line with the corporate plan. SAPO would be aiming at a staff cost to revenue ratio of 40%, because it was currently at 78%, and that was not sustainable.

He said that making the post office smaller would mean it had less and less of a chance to emerge as a competitive organisation and that was not SAPO's plan. In relation to the differences between the previous and current corporate plan of SAPO, Mr Barnes said that  he had engaged with the executive for eight days continuously and they had drawn up every item line by line – checking every car, every truck, the cost of these, the cost of insurance, what statutory increases and inflation would mean. In SAPO's revenue strategic session in April 2016 the first question had been: what market share was it anticipating in courier business? Then SAPO looked at who owned that market share at that time, how had DHL, Fedex and Postnet got that market share, where they were located, how could SAPO compete, could it get other big orders and so on.  SAPO had some repeat distribution business and 90% of its business was corporate. The projections for the future were resilient, and they were commonly shared by all the executive.

He said it was important for SAPO to implement its voluntary severance packages (VSP) and early retirement,  and that was not retrenchment. 

CFG had been a historical and current embarrassment for SAPO, because not only had it been a total failure, but had been the one case most exposed to competition. It had been unable to deliver intact and on time, so its competitive advantage was not there. Getting that business back probably would involve a change of people, repositioning in the market, which would need money, as one of the fundamental things that had been at risk had been the post office brand. CFG was currently at almost zero business level.

Mr Barnes explained the corporatisation of Post Bank and net asset value (NAV) which was in excess of R2 billion, and the section 12 application had been deemed to be complete though SAPO had not been given the notice. People, including Reserve Bank, were hesitant to be the first to stand and defend the Post Office and when SAPO had put the Reserve Bank on the spot as to when it would give SAPO the certificate, it had concurred that the application was complete but the certificate would be granted “soon”. After that, it had one year to  get through the full corporatisation process and to get its section 15 approval to make PostBank a fully-fledged bank. There were concerns about SAPO being the controlling company of PostBank because of its financial position.

Dr Lushaba said that there had been an allocation of R481 million for the 2014/15 financial year by NT and R205 million had been paid over to PostBank in the same year, part of it used for the section 12 application. SAPO had also received R174 million for the 2015/16 financial year, which was money going straight to PostBank. The full R379 million of allocations went into the corporatisation process. NT had taken back R102 million of the original R481 million,  and the R174 million had been used to engage resources for the implementation phase which was immediately after a section 12 certificate award. The 12 month period of implementation allowed bank approval to go up to section 16 which was the final license. There was a concern that if PostBank did not get awarded section 12 soon, it would, since it was already spending on the R174 million, then have to apply for more money to finish the implementation. The risk of it not getting section 16 was that it might have to start the process all over again from scratch.

Mr Mdu Zakwe, independent Non-Executive Director, SAPO, said that AGSA had raised audit governance concerns. The Audit and Risk Subcommittee realised that the internal audit function at SAPO had been under-resourced and had identified resources within SAPO that could be redeployed to internal audit. The Subcommittee had found that the management commentary around identified deficiencies had sometimes not been hitting the spot where it mattered. SAPO needed to embrace combined assurance with all its assurance providers. SAPO had the risk, internal audit and management as the first line of defence. There was a need for a workshop where AGSA could also participate so as to attest that management had done the correct thing by closing certain items. The Audit and Risk Subcommittee was therefore implementing those controls from a governance perspective.

AGSA had also raised a lot of issues around HR completeness, evaluation, existence and accuracy of assets, covering intangibles, tangibles, heritage and others. The Subcommittee had pleaded with management that the asset controller be made part of the post establishment and that had been done. That person would obviously deal with assets. There had been issues raised around book to value, floor to book, and book to floor in terms of completeness.

The Subcommittee also asked the HR Subcommittee to look into the disciplinary aspects around irregular expenditure emanating from criminal conduct. The Finance function was also very under-resourced but had recently acquired skills by bringing in a tax specialist and an actuarial specialist to deal with the issues raised by AGSA. AGSA had raised the point that even though the finance function had a skills deficiency, there had been no alternative procedures for them to perform their work, which was why the additional skills had now been acquired. The Board was consistently engaged with the Department of Telecommunications and Postal Services (DTPS) to get the skills SAPO needed from NT.

At the system level, the Committee had to understand that some of the things to fix the issues raised by AGSA needed funding . The Committee would find that if management were not equipped with proper information management systems, they would not be able to see danger coming. For instance, assets had been fully depreciated and were running at R1 value but if there was no exception reporting on that, then management would not act on it, although AGSA was able to run a  script over and report. Mr Zakwe did not think it was just a lack of discipline from SAPO's side, but that it did want to re-evaluate the use for life of such assets because they were continuing to be used. There was  also an issue around evergreen contracts where payments had been made on expired contracts due to glitches in the system, now fixed.  Mr Barnes was on a drive to question each and every contract that SAPO had within its supply chain system to ensure that the organisation was getting value for money and that suppliers did perform. The Committee had to be cognisant that at some point there had been a culture of no data ownership, and nobody could give management assurance around so many of the issues AGSA had raised. The instilling of that culture by the Audit and Risk Subcommittee was manifesting itself through the reporting framework the Subcommittee had put to management. In the past, the internal Chief Auditor Executive (CAE) would come and report to the Subcommittee on behalf of management, but that had now been corrected, and it was emphasised that the CAE was supposed to be auditing management, not reporting for it.

There were also a couple of investment cases that IT had put forward to fix SAPO's IT. Mr Zakwe had noted that the network configuration of SAPO in all of South Africa was completely wrong. There was one line of site per region, so if one line went down, the entire region would go down.  SAPO did not have tools in place to monitor the clogging of the network, at the actual kernel where IP packets moved. A generally accepted performance would be 65%, but SAPO had been running at 95% so it was not surprising that the network crashed.  Refreshment of the network infrastructure was needed, but that would also need funding to change the configuration, so that SAPO could be a managed service, where one branch going down would not affect all the others.   SAPO also had a serious challenge on continuity of systems in terms of disaster recovery (DR) and therefore needed major funding to gear up that DR level. In order to get the  PostBank's license, SAPO had to be operating at maturity level 4 out of 5 on continuity. There was currently no money for it to do this. The middleware platform had deteriorated completely within SAPO and that also needed fixing.

At the process level the Audit and Risk Subcommittee had asked IT to have interdepartmental Service Level Agreements (SLAs) with all its customers.

He summarised that AGSA had raised 149 issues. To date, SAPO had fixed 123 . The remaining 26, relating to finance and IT, needed more funding to be fixed, as they involved filling posts and getting new IT.

The Chairperson said that she had told DTPS on the previous day that there had to be standards in corporate plans. One was commitment by entities to deal with issues raised by AGSA and its audit outcomes, as a target. That would assure the Committee that AGSA queries were constantly before executives and the board. The Committee had also alluded to lessons that could be shared between entities on how to present plans and report to the Committee. If the quality was such that the presentations were self explanatory, there would be fewer questions from Members.

Mr Mackenzie said that perhaps people were reluctant and hesitant to defend SAPO because they were not seeing consequences for poor performance. Mr Barnes had mentioned negligence, and sections 77 and 78 of the Companies Act provided for strong action against directors of companies. There was no difference between directors of state owned companies and the private companies. Criminal action could certainly be taken against directors for breach of their duties. He encouraged that SAPO must do this, as this would certainly help SAPO make out its case for more funding and persuade people that the current leadership was committed to ridding the organisation of bad governance.

He reiterated that he still wanted to hear at what precise point a positive trend could be detected that SAPO was turning around, meaning the losses would be lessening in the financial year ended 2017.

He noted that the projections on revenue sources were predicated on SAPO getting its mail business back to pre-strike levels. He could not see this happening because, from his own example, he had used to receive accounts through the post, but when the strike was on, switched to electronic billing and would not switch back, so he also did not renew his post box number. Probably thousands of other SA citizens that had had a similar experience would be doing the same.

He said that SAPO's digital revenue growth was a growth area in terms of e-commerce, but he had been wanting to hear more about speed services which he had regarded as SAPO's best service.

He noted the comment that if SAPO could provide services to Government it would be in the economic interests of everyone. Patriotism was the last refuge of the scoundrel. On 14 April Clyde Mervin, Deputy President, CWU, had said that  “the union notes the outsourcing of basic Government services like population registration, issuing of IDs, passports, South African Social Security Agency (SASSA) grants and related services to white monopoly capital, instead of using SAPO, was yet another element of state capture”’. In the SP, mention had been made about revenue not materialising due to the PFMA. If the SASSA grants were to be used as an example, then SAPO would have to compete in an open market through a tender process and the tender would have to be managed extremely well because if people did not get their grants they could not afford to eat. If SAPO went offline, people would go to bed hungry. He understood SAPO's Catch 22 situation, and asked if it had gone out to tender to renew.

In terms of motor vehicle licenses, which had featured quite prominently as a revenue stream, there was already competition from various sources because the City of Cape Town had already offered to renew Mr Mackenzie’s vehicle license or pay traffic fines online with the same service provider. He asked if that competition had been factored in to SAPO's revenue stream equation? He asked how much SAPO would make out of renewing a single vehicle license?

He understood that for an ID Smartcard, this could be done online, then go into a Standard and First National Bank to do fingerprint verification. Both banks had the e-channel sites ready to go live. Was SAPO at that stage of systems development where it too could cater for that? What would be the revenue from that stream? How secure were SAPO's systems to prevent fraud?

For Digital Terrestrial television (DTT) SAPO had projected R300 million over three years revenue from the DTT project, but Mr Mackenzie wondered under which line item that fell under. The Committee had also heard that the finalisation of the DTT roll-out had been pushed out to 2020. Had SAPO considered the impact of that delay in its revenue projections?

Mr Mackenzie said that there seemed to be some “schizophrenia” at SAPO about PostBank - was it going to remain a part of the organisation or not, seeing that there was talk about corporatisation of the Bank. Would corporatisation mean that PostBank was completely separate from SAPO, with its own board, income statements, balance sheet and was essentially a separate business? He wondered if, since PostBank was part of SAPO, SAPO would have to turn its financial situation around before the Reserve Bank could award the schedule 12 certificate?  SAPO had been projecting massive growth in PostBank revenues from R800 million in 2016/17 to almost a R1 billion more in 2018/19 March, but he wondered where that extra R1 billion in revenue would come from, given the competitive space of financial services? He asked if SAPO had conducted any research into the actual needs of PostBank clients? He was concerned about PostBank being made a fully fledged bank, when part of its mandate was to bank stokvels and those who were in deep rural areas. There was certainly space there to grow.

Mr Mackenzie said that originally, when SAPO was given its mail monopoly by ICASA, that was the rollout of the USO. The Committee would certainly like to see scientific study of exactly what had been the losses incurred.

He thought that going back on the SP was a little disappointing; Mr Mackenzie thought that the mention of using garages as collection points was not innovative, and he wondered if SAPO might not rather consider licensed agencies or franchise operations, instead of going back to a USO-subsidised model?

Mr Mackenzie related correspondence he had received from a citizen frustrated at the closure of the Blouberg post office. Mr Mackenzie had said that because SAPO had been losing more than R100 million a month as a result of its turnaround, it had decided to close some of its branches in areas where there were clusters within a 5km radius of each other, to reduce cost and to ensure future financial sustainability of the organisation. However, when SAPO was talking about regaining trust, this meant this kind of citizen who would probably have found an alternative to SAPO by now.

Mr Mackenzie said that one of the SAPO employees had been at the Standing Committee on Public Accounts (SCOPA) during the presentation by SAPO, and had sent Mr Mackenzie a very long Whatsapp message to the effect that Dr Lushaba was a liar, because the principle of equal pay for equal value was not being applied at the mail processing operations.

Ms Tsotetsi repeated her question on how much interest had SAPO accumulated on overdue creditors’ payments. She asked for a comparison of the most effective way to raise capital and reduce costs, between selling properties outright, or leasing them.

Ms Shinn asked what active support SAPO was getting from the Deputy President and the Acting Deputy Director-General of DTPS, in its negotiations with NT for the funding it required.

Ms Kilian said that SAPO had indicated the value of the SASSA contract, but there had to be an investment made first, before executing that responsibility. She asked if SAPO had made provision in its finances the following financial year, should SAPO be awarded that contract.

She supported Mr Mackenzie’s plea for criminal proceedings to be followed regarding negligent former executives of SAPO, but the Committee was aware that problematic cases could immediately escalate in cost. She asked if  SAPO considered that recommendation and calculated that risk. Talking of transforming a culture was linked to that.

She asked what was the position during the administration of SAPO, and what had been the tipping point.
Mr Barnes said that SAPO certainly did not see ordinary mail levels coming back to the pre-strike levels. Most of the money came from corporate, not retail mail, and one of the reasons why Mr Mackenzie was not getting any more mail in his post was because the corporate campaigns were no longer using the post office. 90% of SAPO's turnaround strategy definitely did not rely on individual personal mail returning to pre-strike levels.

He said that he had written to the relevant parties around the awarding of the SASSA contract; there were systems issues that SAPO had to comply with and it had budgeted for them in the organisational forecasts. There was a long debate on whether that contract had to go out to tender, given that it was inter-governmental in nature. He had tabled SAPO's position in precise legal and economic detail and he was awaiting a response. He would have thought that there were the right skills sets within the country that could have been used.

Mr Barnes said that  SAPO was disappointed on the DTT matter. The demand had not been created and by 2020 the technology could nave surpassed what the offering itself was. SAPO was interacting with ICASA but SAPO's only obligation was delivering against an order. The real issue was about licenses and whether Government would be prepared to make an exception there, because most of the rural populace who would benefit from DTT did not have television licenses.

In relation to revenue growth, SAPO was not not relying on organic growth in the true sense of the term but was talking to regained market share. There was a huge volume of business that still could go through SAPO, even within Government. SAPO did have a competitive stokvels product within PostBank currently. The strategy was not to move from where PostBank was now, to unsecured lending in one go, because the executive had its own reservations about that type of lending. It was rather to move from a deposit taker to a transactions facilitator, which involved no credit risk. Processing of pensions, ID applications and others could be done, and using SAPO's infrastructure as a processing central point. There was no lending margin in the organisations forecast.

SAPO had costed out equal pay for equal value of work and it was part of the settlement to avoid the situation where a manager might be earning less than a teller because of being in different systems.

He noted that one of the reasons that SAPO had decided to reach settlement with the previous CFO was that the legal costs were getting to outweigh the sense of continuing the dispute.

Dr Lushaba interjected that one of the issues that had been driving legal costs and the length of time of proceedings was that SAPO was not able to pay. The Chairperson and the prosecutor had both been external advocates, and were refusing to give SAPO more than five days a month for the hearings. When SAPO pointed out that this was affecting the proceedings, they replied that since they were not being paid by SAPO, they could not afford to lose more days of potential fees from others. There was never an intention that SAPO should not hold people accountable. The former CEO had come with proposals to SAPO three times, and the board had tabled them to the Minister of Telecommunications and Postal Services, Mr Siyabonga Cwele, who decided that SAPO must refuse to accept the terms, but that had also gone to the point that it was not affordable to have him to continue in post.

Mr Barnes clarified that the SAPO's proposal of R3 billion funding to Government had been premised on it creating a valuable asset in five years time. On the projections in the SP, if government were to realise a stake in a similar fashion as the Telkom model, it would only have to sell about 25% of SAPO to recover all of the capital that it would have invested.

Mr Barnes noted that the “tipping point” under the watch of the investigators actually was the culmination of events that began around 10 years ago, when SAPO had paid out R2.7 billion in labour broker costs, amounting to around R1 million a day. The fraud, wasteful and irregular expenditure led to cash being effectively thrown away. The SIU and PP reports cited around R3 billion to R4 billion over the decade. If SAPO still had that money, it would not need anything further to run its operations. Labour, through the strike, particularly the most severe one that affected revenue, had set off the demand for that report.

Dr Lushaba said that the bottom line was that SAPO had been very badly managed and led, and the effects of this had compounded. Leadership instability was so severe that SAPO, between 2012 and 2015, had had three CEOs, four CFOs, three COOs and three board Chairpersons. Creditors were reacting to that kind of bad management.

PostBank had done a client needs study, costing around R2 million, whose outcomes were that brand loyalty had been quite high in the rural areas, at more than 80%. The study also concluded that those clients would have  no resistance to the introduction of new technologies progressively.

There had been good government support in trying to find the money, with good engagement.

He confirmed that at the moment, no interest was accruing to creditors but that did not mean that the issue might not be raised shortly.

In relation to the property question, Mr Barnes said that SAPO was currently undertaking a full optimisation study, but one of the challenges with leasing properties was that some its properties were so derelict that it would cost money to get them back to safe and healthy standards for rental. Certainly SAPO would treat its property portfolio as a revenue source after optimisation.

Mr Zakwe said that the electronic bill presentment and payments (eBpp) had been in SAPO's pipeline for a very long time. Comparing the recent innovation by Mr Mark Zuckerberg on peer-to-peer machine communication, using low value high range communication, the consolidator model could be questioned from the same service providers that were currently giving Mr Mackenzie his eBpp.  SAPO had considered all those technologies and were looking into how else it could innovate by combining those technologies for a better service offering in future.

He added that the Audit and Risk Subcommittee had also looked at the cyber disruption risk of rolling out smart cards. This Committee might recall that when the online schools application platform was rolled out in Gauteng it crashed within three hours, hit by a distributed denial-of-service (DDoS) attack. SAPO had thought about that, and was concerned about botnets, used to make unsuspecting individuals apply on wrong platforms so that those individuals’ important data could be stolen to be used somewhere else.

Mr Zakwe also commented on the possibility of a SASSA contract and said that in the contract between SASSA and net1 there was a clause saying that there had to be transfer of skills over time. He thought that SASSA had been building that knowledge base over time. As SAPO was engaging with SASSA, the Agency would decide whether it wanted SAPO as a complete agent or just a dispenser. As a dispenser SAPO would have to invest lower, but as a complete agent that investment level would be much higher.

The Chairperson said that Parliament had previously had discussions about the PFMA being a hindrance to SAPO being competitive with other entities. Any waiver of the PFMA had to come from NT, but further engagements would be needed, so that Parliament could be convinced that was the only option.

Other Committee business
The Chairperson read a letter from the Minister of Telecommunications and Postal Services, requesting the withdrawal of the Broadband INFRACO corporate and Annual Performance Plans. The Committee had been due to meet with this entity at its next meeting and would have to add something into the debate on 10 May to state that the plan was withdrawn.

ANC Members agreed with the Chairperson's proposal to cancel the meeting in the following week.

Ms Shinn  said that it was still baffling that the Committee, after all this time, still did not know what Broadband Infraco was doing. Whilst she supported the cancellation of the meeting, she commented that this was an issue repeating itself and that suggested gross negligence on the part of the DTPS, for which it should be held accountable.

The Chairperson told members that the draft budget vote report of the Committee would be circulated so that Members could then work through it, and they should send input to the Management Committee, in order for the final draft to be circulated by 15 April and adopted on 26 April.

The meeting was adjourned.