SITA Annual Report 1999/2000: briefing

Meeting report

PUBLIC SERVICE AND ADMINISTRATION PORTFOLIO COMMITTEE
19 October 2001
SITA ANNUAL REPORT 1999/2000: BRIEFING

Acting Chairperson: Mr DJ Sithole (ANC)

Documents handed out:
Annual Report 2000
see the SITA website: www.sita.co.za

SUMMARY
SITA is a unique company in that it is a section 3 (a) company under the PFMA regulation. This means that it is not allowed to profit and to borrow money from financial institutions.

It is also not allowed to raise tariffs under the PFMA regulations, which causes the company to rely heavily on its cash flow. The company was formed two and a half years ago and it is getting to terms with where it wants to be in the next three years but to be certain of its future it would have to asked Parliament to amend its founding Act.

MINUTES
Mr Colin van Schalkwyk, the CEO of SITA, accompanied by Mr M Matiwa, referred to the document circulated as the annual report of the year 2000 and not for the year 2001. The annual report of 2001 has not been published since the auditor-general that changes be made. Neither were appointed in the period covered by the annual report.

The report outlines the mission of the organisation and summarises its actual business culture. It also gives highlights of the current financial year. Mr Van Schalkwyk promised to circulate the 2001 Report to members in due course and said they would do a brief presentation of the current financial year as well.

Income Statement for the year ended 31 March 2000 (pp 37-46)
On revenues Mr Matiwa said SITA was unable to make the budget by 6 percent. This was because they could not get the expected turnover that they had planned for during the budget and the tariffs they thought they would charge did not materialise.

SITA was formed through the combination of three participating partners, the Defence Force, SAPSIT and Central Computer Services. Out of the R98 million in revenues that SITA made, 39 percent came from Defence, 30 percent from SAPS and 29 percent came from CCS.

Cost of Services
This is the cost they have incurred in order to generate the revenue. In this regard SITA was able to be 10 percent below the budget. The labour involved in generating the income was 1.7 permanent people and 416 contractors.

Revenue
SITA made a R91 million profit.

Balance Sheet
This gives a picture of what assets SITA had at that point in time. SITA has assets at the value of R486 million and the composition of those assets were eleven buildings, current assets, cash and trade debtors.

They had book debtors of R295 million which was made of government sectors like local, provincial and national governments.

Reserves
Their share capital was mainly from the creation of SITA, which came from participating departments, which became share capital in the books of SITA like the injection of the shareholder into this company.

As such SITA is not allowed to borrow in terms of PFMA and has to be self-sufficient and be able to survive from the cash it generates from its own operations.

In terms of debt-equity ratio SITA is geared favourably in terms of the industry. Many companies use a lot of debt, which SITA is not allowed to use in terms of how they are structured as a Section 3 (a) company.

Assets
Composed of the building transferred from Infoplan at the tune of R49 million and have a lot of computer equipment in the company which form part of the assets worth about R42 million.

Cash Flow
Cash flow reflects what the company is able to generate. Despite the fact that they made a R91 million profit, the reality is that they are unable to generate cash from operations. The inability to generate cash means one has to have access to the market to be able to fund equipment. However, they bought capital worth R43 million which they got from the shareholder totaling R110 million plus R51 million from companies they took over, giving them a leverage to pay for the capital they acquired worth R43 million. Consequently they were left with R87 million at the end of the first year.

Value Added Statement
This shows what value the company has created and how that value has been utilised. This value generated is from a turnover. How was this value distributed in the pie? From the value generated 9 percent went to the government as taxes. 1.17 percent was paid interest, and 90 percent of the income generated went to the employees in terms of salaries, training and redeployment.

Mr van Schalkwyk added that SITA was a 100 percent state owned agency. In terms of the PFMA regulations around Section 3 (a) companies SITA cannot borrow money and retain profits. This places a massive burden on the organisation because under normal circumstances any company has the ability to borrow money, invest it and repay it over time.

SITA was created to serve the government of South Africa but has no ability to borrow. At the founding of SITA the state made a commitment to inject capital of R123 million over a three-year basis. In the first two years of the organisation the government has kept its commitment however for the new financial year that has not taken place this year and therefore do not have the capital base they have worked from previously. SITA is now focusing primarily on its cash flow.

Although they had a profit in the first and second financial year the cash flow of the organisation has been strained because they cannot borrow money and are forced to use the cash. In addition to that, government departments are notorious for not paying. When they supply a service to a department the common trend is that they get paid after 60 days, some cases after 120 days, the majority of the time in 150 days. This places a major burden on the cash flow of the organisation because they have to provide services irrespective of the flow of cash.

Given a situation where a cash flow is being diminished and they cannot borrow money, when SITA was formed National Treasury said that there would be no tariff increase for a set period. SITA was to make sure that government reduces the cost of IT but what has happened has been the drastic deterioration of the rand. Most of the IT services that are provided are American based services and dollar base. Given that they have cash strapped situation and cannot borrow, an added obstacle is that they cannot increase tariffs - placing an immense burden on the organisation, compelling the organisation to review its activities. The National Treasury is now reviewing the tariff structure of SITA.

Qualifications
In terms of transferring assets, while Infoplan assets have been transferred to SITA, those of CCS have not been transferred as yet and therefore do not appear on the company's register and cannot claim it as SITA even in the year 2001. The Department of Public Works has assured them that this transfer would happen by the end of this year.

As management they have increased the bank balance of the company so that they could be liquid at all times and would continue with the cash flow management so that the company can be strengthened.

The 2001 financial statement
SITA revenue went up by 9.4 percent compared to the previous year and the increase could be attributed to volumes. The ideal situation could be as revenues increase, the costs must decrease but SITA's costs have gone up quite tremendously. Gross profit percentage has remained more or less the same as the previous year where they have made a gross profit of R3.2 million compared to last year's R2.34 million.

The problematic area is the operating expense, which jumped by 90 percent due to fuel increase, foreign exchange pricing and prices in general. Major expenses are distribution costs or marketing costs, non recoverable - a major concern for many companies which spend money on expenses where one does not get income such as the administration staff, or does one spend it on people that generate income?

Mr Matiwa said the first year was not the true reflection of SITA because a lot of resources were not in place and things that needed to be done by SITA were not happening.

As they start to address the issues of the country, expenses have to come to play and a lot of money on expenses include the maintenance of SITA's system, software licences, auditor's fees, depreciation of assets, and so on.

As such, SITA's profits have dropped from R91 million to R4 million due to 90 percent increase on expenses. The explanation was that SITA needed to create a base in order to do what they are expected to do and again profits made by SITA have to be given back to the shareholder due to the fact that they are a section 3 (a) company. Normally companies use profits as reserves in order to move forward and SITA is in an unusual situation.

Normally profits made in the first year do not reflect a true situation because one does not know the problems of the market or business, and the company's definition is still unclear. Only the second and third years that the reality begins to face the company as to whether one is prepared or tuned to face the challenged.

Assets compared to previous year
Last year SITA had R486 million assets and this year they have R590 million worth of assets. At the beginning of the year SITA had cash of R87 million and at the end of the year they had R261 million.

The building and assets remain the same as last year and debtor's book as compared to the previous year. In the previous year they had R301 million and at the end of the year they had R177 million.

Cash Flow
In the previous year SITA was able to generate R52 million and in the current financial year they generated R199 million, which is why SITA was able to end with a favourable balance. However, SITA could not get the same financial capital injection from the shareholder as compared to the first year and the only income they received was R39 million from the SAPS for funding the capital assets. Last year's purchase of assets totaled R43 million and this year they spent R64 million. According to Mr Matiwa, the closing cash was "exciting and good news" for them.

Auditor's Qualification in the current year
Same qualification as the previous year as explained above. End year report also the same in terms of the direction of the company not changing and for the current financial both Mr Matiwa and Mr van Schalkwyk they are becoming familiar with the current financial.

Discussion
Mr DJ Sithole (ANC) asked when SITA would be able to know its own capacity?

Mr van Schalkwyk responded they already have a subdivision of the finances around the three subsidiaries and three operating areas. They have a base to work from for 2001 with the profit and loss statement and would use that as a basis to work from although 2002 would have been an ideal base to work from.

Mr M R Sikakane (ANC) asked whether SITA was saying they had improved their position from the previous year on operating costs?

Mr van Schalkwyk responded that if one were to look at the net profits of R92 million versus R4 million one would say there was no improvement but if one were to look at the cash flow projection within the organisation there is definitely an improvement - negative cash balance to a positive cash balance. SITA is not allowed to make a profit, what they should be doing is to break even.

Mr T Abrahams (UDM) said that quite a number of IT companies were dropping out of the market and the ones that were surviving were turning towards exports, taking advantage of exchange rate, he asked how did that impact on SITA as a government IT structure?

Mr van Schalkwyk said if they start to look at the commercialisation process into the future of the SITA "C" and start to look at other markets outside the country they might see benefits to that. Several governments have approached them on the continent to come and assist them in processes and that would be a new form of revenue generated.

The dollar/rand exchange rate would always affect them since the hard and software components are manufactured outside but they would try and buy local to bring down the costs. Their maintenance and support contracts are always local and prefer to use South African than international contracts.

Ms C September (ANC) asked what forward projection do they have on a three yearly basis now that they had a taste of the first and second year? Where do they want to take SITA in the next three years?

Mr van Schalkwyk answered that they had done a projection and if they had continued along the same lines as they were structured previously from year one they would have reached a situation were SITA would have made a massive loss. Hence the re-focusing of the organisation and looking at the commercialization of SITA "C" component, which is meant to separate the regulatory function from the commercial processes. There would be a need to change the Act because the new business model means changing certain parts of operating.

Mr RJB Mohlala (ANC) asked what would be the breakdown of operating and capital expenses and on the operating expenses what is personnel expenditure?

Mr Matiwa replied that the labour costs went up by 27 percent and secondly they put a lot of money on training. Other item is that they took some departments into SITA territory such as the Department of Mineral and Energy was integrated into SITA and as people come to SITA they normally adjust their salaries, which would have a huge impact on the salary bill.

Capital expenses were allocated on laptops and desktops and hence the reason for spending R43 million in the first year and R64 million in the second year on capital expenses as well as the equipment used with the organisation.

Mr DJ Sithole (ANC) asked what penalties they impose on the departments who do not conform to payments and how do transfers from the Department to SITA relate to the money requested from Treasury?

Mr van Schalkwyk responded that the PFMA expects 30 days from invoice but government departments do not pay on time because SITA is another agent of government and why should they pay on time. Their dilemma is that their client is also their shareholder and as such instead of sending lawyers they send nice letters to them.

When they made a request to the National Treasury it was through the DPSA budget process and work through the shareholder DPSA than go directly them to the National Treasury

Ms L Maloney (ANC) asked how competitive they were visa versa other service providers?

Mr van Schalkwyk replied that they had looked at the incentive scheme, which says if they pay within seven days they will get a 2 percent discount.

Because they have not increased their tariffs they are fairly competitive and have done a study on pricing. The findings are that they need a 7 percent increase in tariff prices in order to get to the levels they require. Unfortunately the Treasury will not give them that increase, agreeing instead on a phasing in of that 7 percent increase over three years. Therefore the price of SITA is very competitive and is also about service delivery to make the competitive even better.

Ms Usha Roopnarain (IFP) asked SITA to shed some light on 3.1 on page 24 "Registered Share Capital", secondly she asked whether there were grants and donations SITA was receiving, and lastly, she asked how financially self-sustainable was SITA?

Mr Matiwa responded that the registered share capital was erroneously done and the R1 billion figure was incorrect and on self-sustainability the answer was "yes and no". If SITA was able to collect debts it would be self-sufficient and the no part is that if the debtors cannot pay SITA then it would not be self-sufficient.

Mr BG Bell (DP) asked whether the report was based on accrual or on cash and whether they were given the right to redline their assets or have they applied their minds to meaningful assets values? He also asked them to explain the R11 million recoverable debts from the income statement and what are the interest charges for people that have not paid? Do they provide services to the private sector? What value is the Department of Public Works putting to the buildings that would be transferred to SITA?

Mr van Schalkwyk answered that with the formation of the CCS, Infoplan and SAPSIT there was no formal billing system. They inherited the invoice system of these organisations where customers were billed for the services but there were no records kept of the billing processes, which resulted in bad debts. No one knew how the departments were charged and they have a situation where the reconciliation between services by Infoplan to the National Defense Force was totally distorted. This is the reason for the formation of the SITA Defense. There was no distinction between the customer and the service provider, which resulted in problems around the finances. As they move forward with ring-fencing those kinds of problems would fall away as far as SITA "D" is concerned.

On SITA "C" or civilian they would engage the private sector in the future especially where they cannot fulfill a performance they would engage the private sector to do that on their behalf and to supplement SITA "C" specifically.

On accrual versus cash Mr Matiwa responded that SITA was in a lucky position because they inherited the accrual system from Infoplan.

The meeting was adjourned.