South African Post Office Bill [B2-2010]: deliberations, Strategic Plan and Budget of the South African Post Office

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Communications

17 March 2011
Chairperson: Mr E Kholwane (ANC)
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Meeting Summary

The African National Congress proposed changes to certain clauses in the South African Post Office Bill, mainly to delete the provisions requiring the Minister of Communications to consult with the Minister of Finance.  Final deliberations on the Bill were scheduled for the following week.

The Chairperson of the South African Post Office Board and the Chief Executive Officer briefed the Committee on the strategic plan for the 2011/12 fiscal year.  The strategic plan was developed in response to the significant impact on the business of the Post Office by declining mail volumes, escalating fixed and operational costs and the establishment of the Postbank as a fully-fledged bank.  The critical success factors and major projects were summarised.  An outline of the legislative and regulatory framework was included.

A new business model was developed, aimed at diversifying the business of the Post Office.  The new business model distinguished between the operating divisions (i.e. mail business, digital business, non-Postbank financial services and properties) and the subsidiaries of the SAPO Group (i.e. the Postbank Ltd and the logistics companies).  A detailed analysis of the mail business, new digital business, online philately shop, the virtual post office, the logistics business, the non-Postbank financial services, consumer services and the universal consumer network was provided.  An overview of the changes resulting from the establishment of the Postbank and the progress made in the corporatisation of the Postbank were given.  The key strategic programmes focused on customer service delivery and on enhancing accessibility to products and services.  The support units included the development of human capital, performance measurement, environmental initiatives and corporate social investment initiatives supported by Post Office personnel.

The Acting Chief Financial Officer presented the budget for the 2011/12 financial year.  Revenue was expected to increase by 3% and expenditure by 6% in 2010/11.  The net profit for 2010/11 would amount to R152 million.  The total budgeted revenue for 2011/12 was R5.9 billion and expenditure was R5.7 billion.  The projected operating profit was R228 million and the net profit was R155.9 million.  Total assets would increase to R10.2 billion.

The major pressure areas were escalating staff and fuel costs.  Provision was made for the Post Retirement Medical Aid liability amounting to R1.3 billion.  The subsidy to fund the Universal Service Obligation mandate would be phased out in 2013/14 and the Post Office warned that the rollout of addresses and post offices might have to be curtailed in future years.

Members expressed appreciation for the well-prepared and detailed presentation.  Questions were asked about the measures taken to mitigate escalating staff and fuel costs; the roll-out of new addresses in rural areas; the virtual post office concept; electronic banking services to grant recipients and protection against scams; the relatively low percentage spent on training; the performance award and bonus strategy and the relevance of and progress made in implementing the 1998 White Paper.

Meeting report

Deliberations on the South African Post Office Bill [B2-2010]
The Chairperson advised that the African National Congress (ANC) had suggested certain changes to the provisions of the Bill.  The changes were referred to the Office of the State Law Adviser for inclusion in the final version of the Bill, which was expected to be finalised during the following week.

Ms T Ndabeni (ANC) took the Committee through the proposed changes.  The phrase ‘with the concurrence of the Minister of Finance’ was deleted in Clauses 3 (5) (b) and (c), 8 (3), 8 (4) (a), 18 (5) and paragraphs 4.7 and 4.21 of the Summary of the Bill.  The word ‘Committee’ in Clause 12 (5) was replaced with the word ‘Minister’.  The changes to Clauses 12, 22 and 23 suggested by the ANC were included in the latest draft of the Bill.

Ms J Killian (COPE) requested that the suggested changes were documented to allow Members to consider the amendments within the broad context of the Bill.

The Chairperson requested the State Law Adviser to include the proposed changes in the Bill for discussion by the Committee during the deliberations scheduled for Tuesday, 22 March 2011.

Briefing by the South African Post Office (SAPO) on the 2011/12 Strategic Plan
Ms Vuyo Mahlati, Chairperson of the SAPO Board introduced the delegates and presented the Chairperson’s overview to the Committee (see attached document).

The critical success factors included a review of the SAPO governance structure; the implementation of the new Companies Act; compliance with the King III Code; the implementation of the Postbank Act; the development of an appropriate labour model; succession planning; change management; performance management; employee development; employee wellness and improved labour relations.

Major projects included a review of the SAPO business and operating model; strengthening the information technology platform; the diversification of sources of revenue; strengthening the procurement processes, developing a funding plan for the SAPO Group and the synergies and consolidation of the various business units.

Ms Motshoanetsi Lefoka, Chief Executive Officer, SAPO presented the overview of the corporate strategic plan of SAPO for 2011/12.  The vision, mission statement, core values and the alignment of SAPO’s mandate with the key priorities and program of action of Government were summarised.  The applicable international and domestic legislation and regulations as well as the ending legislative changes were listed.  The social mandate of SAPO was aligned with the priorities included in the President’s recent State of the Nation Address.  Details of the goals and programs for each Government priority were provided.

The Universal Service Obligation (USO) of SAPO included the provision of postal addresses and post offices throughout the country.  The existing and target number of addresses and service points in each province were provided.  The target number of new addresses for 2012 was 1.6 million.

The current business model of the SAPO Group comprised the mail business, logistics, financial services and new businesses.  The proposed new business model distinguished between the operating divisions (i.e. mail business, digital business, non-Postbank financial services and properties) and the subsidiaries (i.e. the Postbank Ltd and logistics companies) of the SAPO Group.  The mail business, new digital business, online philately shop, the virtual post office, the logistics business, the non-Postbank financial services, consumer services and the universal consumer network were analysed in more detail.  An overview of the changes resulting from the establishment of the Postbank and the progress made in the corporatisation of the Postbank were provided.

The key strategic programmes were focused on the customer and on enhancing accessibility to products and services.  The support units included the development of human capital (i.e. transformation programs, job creation and developmental programs), environmental initiatives, performance measurement (i.e. the financial and social business balance scorecards) and the corporate social investment initiatives supported by Post Office personnel.

Mr John Wentzel, Chief Operating Officer, SAPO provided a more detailed explanation of the virtual post office concept and the current status of the corporatisation of the Postbank.

The briefing was concluded with a summary of the revenue focus areas, the ten most significant risk areas and the critical success factors.

Briefing by the South African Post Office (SAPO) on the 2011/12 Budget
Mr Nick Buick, Acting Chief Financial Officer, SAPO presented the budget of SAPO for the 2011/12 fiscal year (see attached document).

The briefing included an overview of the prevailing market factors that impacted on SAPO (i.e. the consumer price index (CPI), the producer price index (PPI), the prime interest rate, gross domestic product (GDP) and the fuel price).  The growth in digital communication resulted in a decline in mail volumes.

SAPO forecasted a 3% growth in revenue and a 6% increase in expenditure for the current fiscal year.  Net profit for 2011 was expected to amount to R152 million (R293 million in 2010).  Although SAPO recorded a decline in operating and net profits since 2006, the entity remained profitable and expected that the global economic outlook would improve in forthcoming years.

Total budgeted revenue for 2012 was R5.9 billion.  Mail revenue was expected to increase by 3.8%, logistics revenue by 8%, financial services revenue by 10% and Postbank non-interest revenue by 8%.  Interest revenue would decline by 3%.  A detailed breakdown of the interest income illustrated the sensitivity to fluctuating interest rates.

Total budgeted expenditure for 2012 was R5.7 billion.  The major pressure areas were escalating staff and fuel costs.  Staff costs were 51% of total expenditure and any increase above 5% would have to be supported by increased revenue and productivity.  Transport expenses were 11% of total expenditure.  Accommodation (premises) costs were 10% of total expenditure.  The Post Retirement Medical Aid (PRMA) liability provision increased to R1.361 billion.

A breakdown of the subsidy allocation from 2010/11 to 2013/14 and the funding requirement for implementing the USO for the corresponding periods were provided.  The subsidy declined from R306 million in 2010 to R54.8 million in 2013/14, where after it would cease.  The funding requirement for USO increased from R306 million to R392 million during the same period.  SAPO warned that the rollout of USO might have to be curtailed in forthcoming years and anticipated an increase in borrowings to fund capital expenditure after 2013/14.

The budgeted operating profit for 2012 was R228 million and the net profit was R155.9 million.  Total assets increased to R10.2 billion.  The budget for SAPO (excluding subsidiaries), the budget for the logistics subsidiaries and the budget for the business units were included.

The briefing included the projected budgets for the period 2012 to 2016 for the SAPO Group, the Post Office, the logistics subsidiaries and the Postbank.  The presentation was concluded with graphs illustrating the applicable financial ratios from 2005 to 2012.

Ms Lefoka advised that Mr Buick had been appointed as the Business Support Executive and a new Chief Financial Officer would soon be appointed by the Minister of Communications.  A recent Appeal Court ruling found in favour of SAPO and confirmed that the Post Office remained the official Government grant delivery vehicle.

Discussion
Ms Killian thanked SAPO for the well-prepared, detailed briefing.  The corporatisation of the Postbank was a major challenge for the organisation and she was pleased to see that good pro-active planning had been done to diversify the various business units and that there was sound strategic leadership in place.  She noted the decline in profitability since 2007 as a result of the economic downturn and the escalating fuel and staff costs and asked how the plans addressed these conflicting trends and if a good balance between operational and capital expenditure could be maintained.

Ms S Tsebe (ANC) asked if there were any timeframes and costs associated with the programmes to address the reduction in mail volumes.  She asked what percentage of new addresses was in the rural areas.  She extended the thanks of the Baphalane Ba Mantserre tribal authority for the new post office in Mantserre Village (in the Moses Kotane Municipality in the North West province).  She asked for more information on the R1.2 billion PRMA liability provision.

Ms W Newhoudt-Druchen (ANC) asked if the concept of the virtual post office had been implemented.  She asked if an old age grant recipient was able to check if the grant had been paid into his account and if it was possible to make electronic payments at virtual post offices.  She asked what security measures were in place to safeguard customers from scams.  She suggested that SAPO refrained from using a dollar symbol in its presentation documents.

Ms Lefoka replied that currently SAPO was undergoing a major transition and the organisation had only one opportunity to get it right.  A lot of people depended on the services provided by SAPO and the complex regulatory environment meant that it was critical that personnel were properly skilled.  The successful implementation of the business plan was the major priority of the Board.  Profitability was adversely affected by declining mail volumes and interest rates and SAPO had suffered a crippling strike in 2009.  The diversification plans were developed to address the challenges and to reduce operating costs.  The digital mail business had seen growth of 40% over the preceding two years and contributed to a reduction in costs.  More attention was being paid to develop other aspects of the business, for example post office box rentals, direct mail and motor vehicle licenses.  It was important that the services offered by SAPO were affordable.  Fixed costs continued to escalate and were currently under review.  The inequality in salaries was a major challenge and had to be addressed.  To date, 80% of the issues had been dealt with and SAPO continued to address the remaining issues.  The cost of fuel was not under the control of the entity but initiatives to mitigate the impact included consolidating routes, using more fuel-efficient vehicles and decentralised printing.  SAPO had built a successful logistics business and hoped to conclude the consolidation programme in two years.  The costs, benefits and timeframes of the integration programmes were included in the briefing documents.  She thanked the Baphalane community for the support provided to SAPO.  The matters raised by the Committee during earlier engagements had been responded to in a document circulated to the Members.  A list of the new post offices was included in the written response.

Mr Wentzel advised that the online philately shop was in place.  A pilot virtual post office had been established but additional centres would be launched once the initial challenges had been resolved.  Old age grants were currently paid out through the Postbank and SAPO was considering increasing the number of channels that would allow customers online access to information.  Few grant recipients had online access and SAPO was investigating making use of agents and mobile banking to expand online access to customers.  The ability to pay accounts electronically was already in place but the virtual post office concept would allow for an increase in the number of payees.  The technology and systems implemented by SAPO provided protection to customers against nefarious practices and scams.

Mr Janras Kotsi, Group Executive: Mail Business, SAPO advised that the address roll-out programme commenced in 1999.  The target for the first three year period was 4.1 million addresses.  The target for the second tranche commencing in 2005 was exceeded as well and 5.7 million addresses were serviced.  The target for the remaining three-year period was 4.9 million addresses.  The focus of the roll-out programme was the rural areas and approximately 60% of the addresses were in rural areas.

Mr Buick said that SAPO invested in providing both Postbank and non-Postbank financial services.  The entity was reviewing the mail business and implemented cost-saving measures while continuing investing in areas with growth potential.  SAPO may have to cut back on capital expenditure once the subsidy was phased out but would continue to manage the business to ensure that the USO mandate was met.  The PRMA liability arose when SAPO agreed to subsidise the medical aid contributions of personnel who retired before 2002/03.  The liability had increased because medical aid inflation outstripped the mortality rate of the members.  Certain assets had been ring-fenced to cover the liability but the amount was expected to reduce over time.

Ms Killian observed that SAPO had a low 1% investment in staff training.  She suggested that the percentage was increased in order to meet the planned development of human capital.  She suggested that a performance award scheme was introduced and that the performance evaluation process was explained to the staff.  SAPO was currently in a change management phase and she would like to know what the next phase would entail.  She asked if SAPO had a staff retention scheme in place.

Ms Mahlati replied that SAPO had focused on the address roll-out programme, the retail operations and the IT systems in previous years.  Staff development was critical to ensure service delivery.  Despite the decline in profits, the social mandate was expanded.  SAPO had a strong, conservative investment strategy, which was closely managed and allowed the organisation to have limited exposure to risk and to be in a position to deal with the threats.  No bonuses were paid in 2010 and the challenges and priorities had been agreed with the management.  The previous disparities in salaries and bonuses had been addressed and benchmarks for performance had been set.  A new performance award system was being developed and communication with staff had taken place to explain the reasons why no bonuses were paid.  She conceded that a relatively low percentage was sent on staff training but the organisation was satisfied with the effectiveness of the training that had been done.  SAPO was concerned over the loss of trained staff to other financial institutions.

Ms Lefoka added that the remuneration strategy was based on both team and individual performance.  SAPO had consulted with the labour union on the development of the strategy and had embarked on a job-profiling exercise.  The consumer services operation was the first area where rewards and recognition were introduced, based on the rating of the service by customers.  She would like to see an increase in the percentage spent by SAPO on training but the organisation had a satisfactory relationship with the relevant Sector Training and Education Authority (SETA).  More personnel are undergoing training and more learnerships were made available.  Staff was absent for a period of two to three weeks whilst attending training courses and then had to complete a minimum period of practical on-the-job training in order to gain experience.  Most training programmes were focused on the lower levels but there was a need for management training as well.  The presentation included a schematic illustration of the ‘me, work, world’ concept behind the human capital development strategy.

The Chairperson observed that the strategic plan remained within the mandate set out in the 1998 White Paper.  He asked SAPO to review the White Paper and ascertain what had been accomplished, what remained outstanding and if the White Paper was still relevant.  He asked when SAPO would be in a position to meet the USO mandate without having to rely on additional sources of funding.  The subsidy was never intended to be of a permanent nature but if the Committee considered an extension, Members would need detailed information on why and how the funds would be utilised.  He asked to what extent SAPO developed public/private partnerships and what the outlook was for the sector as a whole.  He asked what the SAPO footprint was for ICT connectivity, particularly in the rural areas and what contribution was made to connect ordinary people with Government.  He asked SAPO to provide a map of the country that indicated where post offices were situated.  SAPO’s interaction with the Committee would continue and the services delivered by the entity would be reviewed during Committee oversight visits.  He asked what further legislative amendments were required to allow SAPO to implement the strategic plans.

Ms Mahlati advised that regular engagements took place between the SAPO Board and shareholders.  The Board had a clear vision for the sector and the strategic plans had been developed accordingly.  A review of the White Paper and the applicable legislation would be undertaken.  SAPO understood that the subsidy arrangement was not permanent and the subsidy amount was excluded from the profit statements.  SAPO took its USO responsibilities seriously but had to cover the cost of providing infrastructure, such as roads and electricity, in certain areas as well.  She appealed to the Committee to consider the cost of implementing the USO mandate, which was a significant financial burden.  SAPO was a forward-looking organisation and had developed some initiatives and proposals that could be presented to the Committee.

The Chairperson thanked SAPO for the briefing.

The meeting was adjourned.

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