South African Post Office: Strategic Plan & Budget 2009 to 2012: briefing

Meeting report

South African Post Office (SAPO): Strategic Plan and Budget 2009-12 briefing
Overview of the Board of Directors
Ms Vuyo Mahlati, Chairperson, Board of South African Post Office, introduced the overall areas of the Post Office from a strategic perspective.  She provided an overview of the Board of Directors, beginning with a historical background of the Post Office to orientate the Members, the majority of whom were new to this Committee and thus unfamiliar with the activities of the South African Post Office (SAPO). The Post Office had been a part of the Department of Post and Telecommunications before it was incorporated in 1991. Since then, it had gone through five stages of its history: the initial commercialisation from 1991 to 1998, followed by a strategic management partner era from 199 to 2002. From 2001 through to 2004 it had undergone restructuring and transformation, from 2005 to 2006 had repositioned itself and from 2007 had entered a growth, development and sustainability era

There had been problems experienced during the commercialisation period and in 1999 these had created a need for the entity to be assisted in terms of strategic direction, because it was making huge losses. However, the introduction of a strategic management partner from New Zealand had not produced the anticipated improvement, resulting in the termination of that contract. A review of the focus of the Post Office started in 2001, and the restructuring and transformation resulted in positive results for the first time in 2004. The transition from being a government department to a competitive company within the global economy had required strengthening as a result of the repositioning. However, in 2006, it became apparent that new challenges had arisen with the initial wave of transformation, and certain areas required attention, more specifically in terms of corporate governance in relation to procurement. The South African Post Office had therefore initiated a process of interrogating its structure, and more specifically its systems and processes, to ensure that the business was supported in the right way. In 2007 it began an era of growth, development and sustainability. 

The audit that had been performed by SAPO had not just been systemic but had been very people-centered and had enjoyed strong support and collaboration with the Portfolio Committee and the Labour Unions. The “waves of transformation” had seen a difficult process up to 2004, and then much litigation, including the Chief Executive Officer having been sued. However, in 2007 SAPO had begun the right direction towards a growth trajectory that resulted in the delivery of the best results in the entity's history in 2008. Unfortunately the current global economic crisis had crippled some of these gains. She was nonetheless satisfied with current profits, although a formal report was yet to be completed for the Committee.

The Board's focus for the 2009/2010 financial year was in four main areas. She outlined the objectives as including the institutionalisation of corrective measures for organisational stability and operational efficiency, the creation of a culture of compliance and corporate governance, the strengthening of leadership and improvement of the performance of the Board in discharging its fiduciary duties, and creation of an enabling environment for enhancing sustainable growth and development of SAPO.

She noted that SAPO was a public company established in terms of the Companies Act, 61 of 1973. The State was the sole shareholder, represented by the Minister of Communications. SAPO had already met with the new Minister and had presented the plans and strategy. The State as shareholder, through Cabinet, appointed directors for a renewable fixed term of three years. The roles and responsibilities of the Board were defined in the Articles of Association, Shareholder’s Compact, Board Charter and the Companies Act. The Board comprised sixteen members, four Executive Directors, and twelve Non executive Directors. The Board conducted its meetings quarterly and also held strategic sessions and risk assessment workshops. The Board had six Committees (a Chairperson’s Committee, an Audit Committee, a Human Resources and Transformation Committee, the Postbank Committee, the Remuneration and Performance Management Committee, Risk Management) and one Stamp Advisory committee, all chaired by non-executive directors.

Ms Mahlati highlighted some of the challenges on which SAPO would require assistance from the Committee.  One of these areas was dealing with the implications of economic downturn on SAPO’s business and mandate. The post office had to expand in line with its universal service obligation. Much work had been done to address expansion, including rolling out over 5 million addresses, at a cost of R1.6 million annually to rural areas and other previously-marginalised areas. However, global practice and the recession in South Africa had made it difficult in terms of expenditure, since SAPO increasingly had to ensure proper cost management and cost containment.  Another area lay was in coherence and co-ordination of SAPO's vision with the work of Government stakeholders such as the Independent Communications Authority of South Africa (ICASA).

SAPO had suffered negatively as result of crime in the form of armed robberies and was working closely with the South African Police Service (SAPS) to deal with this problem. The implications of the new business model were also another consideration, and how they would be advanced in the current financial year.

Postbank was ready to move from a savings bank to a fully corporatised bank that operated effectively in the global economic environment and specifically targeted the poor by providing them with banking products and services.

Another area of focus was Logistics Consolidation and Postal Addressing and Postal Code Restructuring. SAPO had some problems in performance standards, as there were certain structural problems around the postal codes and postal addressing that made it difficult to achieve SAPO’s desired performance targets in certain areas. South Africa's dynamic human settlement environment posed challenges and this would be a complex initiative.

Ms Mahlati summarised that SAPO had a long way to go in terms of consolidating its existing gains, structural synergy for operational efficiency and revenue growth. It would require assistance with the corporatisation of Postbank and also in relation to certain litigation in which the judges had been harsh on SAPO. She hastened to add that other major court cases had been managed well; in one a claim of R200 million had been settled, and in another a claim of R500 million, without SAPO having to make any payment, which had greatly reduced its liabilities. SAPO was attempting to avoid future such litigation.

SAPO Organisational Overview
Ms Motshoanetsi Lefoka, Group Chief Executive Officer, SAPO, briefed the Committee on the legislative environment within which the South African Post Office operated, highlighting the specific legislation, international regulations and Conventions such as the Universal Postal Regulations which regulated several issues pertaining to service standards and environmental concerns. She reiterated SAPO’s vision and mission and the South African Post Office values. The organisation would respond to the nation's social mandate by focusing on the ten priorities highlighted in the State of the Nation Address. It would continue with Triple Bottom Line Reporting, as had been done in the current financial year. SAPO had also set targets for the fulfilment of license obligations.

There were four key areas that had emerged in global trends in the postal environment, namely: optimisation, innovation, diversification and globalisation. These issues were taken into consideration in SAPO’s business model. The business model itself considered five major business units, which currently comprised mail, logistics, financial services, Information and Communication Technology (ICT), and properties. The Committee was taken through these specific elements of the Group's structure through the consumer services channel as reflected in the presentation (see attached document for detail).

A transformation framework had been developed to implement the business model, based on five business pillars of transformation, namely: business restructuring, organisation design, corporate governance, high performance organisation and human capital development. Ms Lefoka highlighted the various issues in each of the individual pillars (see attached presentation)

Mail Business Overview
Mr Janras Kotsi, Group Executive: Mail Business, SAPO, then gave an overview of the key projects and performance trends in Mail Business.  The organisation was divided into four components, namely: postal business, postal solutions, communication and e-fulfilment. The Committee was shown a map illustrating the 'mail footprint', in terms of the distribution of mail centres and delivery depots in all of the country's nine provinces. The presentation also highlighted mail volume trends and the challenges faced by the Mail Business in terms of issues such as access to the internet, growing mobile phone usage, demand for cheaper, better and sophisticated services, de-regulation and contribution to job creation and the creation of a second economy. The major key projects included the development of a new postal addressing system and postal code system that would also cater for rural and informal addressing, and enhance international mail capability and comply with international standards.
 
Logistics Overview of Courier Freight Group (CFG)
Mr Molefe Mathibe, Managing Director: Courier Freight Group, presented the CFG’s business model, with particular focus on the area of Food Party Logistics (FPL), where there was potential for expansion. The entity needed to ensure that transport was consolidated across the whole of the Post Office. Current expenditure estimates were in excess of R300 million on transport, and this business was handled by private companies. Warehousing was another area of expansion, considering the huge volumes of mail handled by the Post Office, and the number of buildings that they owned for this purpose. The Post Office had logistics offerings in two main categories at present – namely, freight and courier services – both of which were very strong brands. The main issue at present was that the business was running as separate entities and the infrastructure should be consolidated. Logistics was all about scale and utilisation, and all assets from each of the different environments should be brought together and used together. The Committee was shown the value proposition and core offering for each of the brand names associated with the freight and courier services. Its key projects and performance trends were also highlighted to the Committee.

Postbank Overview
Ms Totsie Memela-Khambula, Managing Director: Postbank, provided an overview of Postbank, beginning with the financial services business model, which highlighted the financial products available to consumers and corporations. The Committee was also briefed on the entity's financial services mandate and financial services product portfolio. The presentation highlighted Postbank corporatisation as the key programme in this unit, which would see Postbank operating as a profit centre within the existing Post Office divisional structure, and with an expanded product range. The expansion of payment services to retailers would enhance, for instance, payment of traffic fines and the processing of garnishee orders by the courts. Plans were also in place to develop and implement money remittance services and systems between South Africa and other African countries in the region.

Group Financial Summary 2008-2009
Mr Nick Buick, Chief Financial Officer, SAPO, presented the Group's financial summary for the 2008/9 financial year. He tabled the Group's income statement and revenue growth in each of the divisions of the Post Office, which averaged 7%. Expense growth showed high increase in transport and accommodation costs and an average increase of 9% for the Group. The Committee was also shown a summary of the Group's balance sheet and illustrations of increases in capital investment. Trends in the Group's operating profits, profit margin and the Group's revenue and expenses were also explained. The presentation concluded with an economic outlook, which considered the negative impact of the downturn of the economy on revenue and cost, the volatility of the rand, lower interest rates and Gross Domestic Produce (GDP) growth and inflation on imported goods and services.

The critical success factors of SAPO were then highlighted (see attached presentation) by way of conclusion.

Discussion
The Chairperson commented that the presentation illustrated the great effort that had been put into turning around SAPO to become its current successful entity.

Mr T Bonhomme (ANC) complimented the team on its good presentation. He asked if, in relation to health matters, there was a separate programme for HIV and AIDS.

Ms Lefoka responded that SAPO had an employee HIV-wellness programme and had enjoyed full participation in HIV testing and counselling initiatives. SAPO had also formed an HIV support group within the organisation. There was a very sound employee wellness programme in place, which also included various sporting activities.

Ms M Magazi (ANC) asked for clarification on the matter of the New Zealand strategic partner. She asked for further information about the reasons why the contract had been terminated.

Ms Mahlati responded that there had been sourcing of expertise from abroad to assist state entities and parastatals with re-engineering. New Zealand had been brought in to be the strategic management partner. However, the performance results had shown that there was too much reliance on consultants and discomfort from the organisation about the relationship. The contract was then terminated; it had largely been a performance issue.

Mr E Kholwane (ANC) asked what was happening with the case of the former CEO of SAPO.

Ms V Mahlati responded that there was still an issue with both the former CEOs Mr Manyatshe and Mr Mampeule. As far as Mr Mampeule's case was concerned, there was a technical issue, which had escalated to the level of the Labour Court. He had argued that he had been unfairly dismissed and was suing the Post Office for about R20 million. The Post Office argued, on the other hand, that the termination of the contract was on the basis of a clause stating that the contract would automatically terminate on removal by the shareholder, and thus did not regard the termination as a dismissal. The matter had gone to court, and was in fact a point of national interest, since the argument of SAPO was based on the Companies Act, whilst the Labour Court dealt with the matter from a Labour Act perspective. A recent Labour Court ruling was in favour of the view of Mr Mampeule. SAPO had appealed since this had an implication not only on the situation of Mr Mampeule, but also on the current contracts for the Executive of SAPO. Papers had been lodged and SAPO was awaiting the allocation of a date for the appeal. Whatever the outcome of the appeal, the courts were not dealing with the merits of the case, but were dealing with a technicality, and it was important for people to read this appropriately.

Mr Kholwane also commented that there was a matter that the media had picked up in relation to the outcry about the appointment by the Post Office staff to the labour programme. The ANC had made a commitment to decent work, and he asked for comment on that labour programme, and especially reports of salary discrepancies. The ANC was against labour programmes and this had been clearly spelt out in their resolutions.

Ms Lefoka responded this was an issue that was taken very seriously by SAPO. She indicated that SAPO’s business was seasonal in nature and followed a particular pattern. In order for SAPO to be optimally staffed, it required a really flexible labour model, that would include people who would work on a temporary basis. The Post Office Labour Union had been looking at ways of dealing with these issues already from 2007. The fees that were paid to labour brokers included certain basic employee benefits. In 2008 the Board had allowed the Post Office to look into the issue of 'permanent part-timers', and how they could be absorbed into relevant areas on a permanent basis. There had been certain challenges in Consumer Services, for instance, where there were requirements imposed by the Financial Intelligence Centre Act (FICA), to the effect that all persons employed in a bank had to be in possession of a matric certificate and a clean credit record.

Mr Kholwane asked if Parliament was at fault in any way regarding the tabling of SAPO's plans for the restructuring of postal addresses and postal codes. He enquired if this was ready and was only being delayed by Parliament. Another issue related to this restructuring was the question of its impact on job losses, especially considering the current economic downturn.

Ms Mahlati responded that the delay was not Parliament's fault. The Board had not approved the plans, because Management was still busy working on them. As soon as the Board was comfortable SAPO would table the plans; it was however being very cautious about how it was done and was checking everything to leave no room for mistakes.

Mr Kholwane asked about the issue of de-regulation, and questioned when SAPO's monopoly would end.

Ms Mahlati responded that the Board was very concerned about this from a policy perspective. It was an issue that had been raised with the Minister. Every three years the licence of SAPO was reviewed, and it did not want to have doubts as to whether that would be reviewed, as this would create enormous uncertainty. SAPO was not so much concerned as to whether de-regulation occurred or not, but whether it would know in which direction it was headed. From a strategic point of view SAPO wanted to have certainty, and that was why it considered that it was desirable to have collaboration between SAPO and ICASA, to make sure that the issue was clarified, since it also had an impact in terms of the mandate and the infrastructure. SAPO had done a demand study that indicated where the new Post Offices should be rolled out.  That would actually help, since the current arrangement was to cover about 14 000 households by each Post Office, which would create some problems on the currently-gazetted tariffs.

Ms Lefoka added that the South African Post Office had a monopoly in terms of its business model, especially looking at the mail business, but that only the business relating to letters and parcels that were below 1 kilogram was protected at present. Other entities also operated in Mail Business, and the issue was how the regulations protected the issue of the monopoly supposedly enjoyed by SAPO. Although the Post Office was supposed to enjoy a monopoly, in fact in most cases it did not. For example, in terms of international mail, there were extra-territorial offices of exchange that had been established in South Africa by international postal operators, who would bulk mail together in parcels that would then be sent as courier items, injecting the courier parcel into the Post Office at a domestic tariff, instead of the international tariff. There were also establishments, some being governmental entities such as municipalities, who delivered their statements themselves, although this fell within the SAPO environment. SAPO, in these instances, expected ICASA to play a regulatory role.  Therefore, de-regulation could be looked at, but the element of ensuring that universal service obligations were maintained by the service providers was important for the sake of accountability.

Mr Kholwane asked SAPO to tell the Committee what it was doing about thefts involving relatively small amounts of money. Although the presentation had covered major syndicate crime and armed robbery, there was still a need to provide assurance to depositors that something was being done about the theft of small amounts.

Ms Lefoka responded that the syndicates within the Post Office had been operating in different areas. Some had been defrauding the Post Office directly, others had defrauded customers and some had used the Post Office structures for other types of fraud, such as stealing mail to facilitate identity theft. The problem was that when a syndicate was broken in one area it would move to a different area. The instances where postal officials themselves defrauded members of the public were limited, although there had been a few cases where officials had purloined money deposited. There were internal disciplinary processes in place to deal with those culprits.

Mr Kholwane asked whether all municipalities were on board regarding the issue of traffic fines.

Ms Lefoka responded that progress was being made, although some provinces such as Mpumalanga were not yet included. She noted that Johannesburg Metro, Limpopo, Free State and some municipalities within the North Western Cape province were some of the areas where progress had been made.

The Chairperson asked which component in the SAPO had been most affected by the restructuring and what would be the trend in the next 18 months.

Mr Mathibe responded that restructuring presented great opportunities to deal with a problem without affecting permanently-employed people. SAPO had a complement of contracted labour, but was looking at increasingly utilising the current staff, cutting down on contracted labour, as the best way to deal with the issue. There was thus unlikely to be loss of permanent jobs, unless the recession hit further.

The Chairperson asked whether there was efficient infrastructure capacity for expansion into other areas, such as garnishee orders. SAPO's system for shares had experienced an overload and crashed repeatedly. Even if it made business sense to expand, he was worried that there might not be the capacity.

Ms Lefoka responded that there was an infrastructure programme that had been initiated in about November 2008, which would run until October or November 2009, and which would stabilise the expansion of the business network. There were other infrastructure systems that had been put in place, especially for the banking system, such as the piloting of the point-of-sale systems. All the projects would be implemented from a full-strength perspective through infrastructure planning and through a phased approach .

The Chairperson requested that the SAPO shareholder's compact, its Charter and Articles of Association be tabled before the Committee for record purposes.

Ms Mahlati assured the Committee that the Minister had signed the shareholder's compact, Articles of Association and the corporate plan for the year.

The meeting was adjourned