SABC Government Guarantee Conditions: Progress Report by Department of Communications, SABC and National Treasury with Deputy Minister

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Communications and Digital Technologies

15 August 2011
Chairperson: Mr S Kholwane (ANC)
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Meeting Summary

The Department of Communications, the South African Broadcasting Corporation, and the National Treasury briefed the Committee on the SABC’s Government Guarantee and its conditions, and the progress made by the SABC in repaying its loan.

The DoC’s presentation focused on why the SABC needed the loan, the Government Guarantee conditions, and the broadcaster’s financial performance. The plan was to form a basis for monitoring the cost-saving and revenue enhancement initiatives on a monthly basis. The SABC had to take corrective action to address issues identified in various reports including those of the Auditor-General and Ministerial Task Team.

Another Government Guarantee condition was that a Monitoring Task Team had to be set up comprising the SABC, the DoC and Treasury, to receive and consider monthly performance progress reports produced by the SABC. This Monitoring Task Team would make recommendations to the Minister and inform the Minister of Finance as part of its performance monitoring duties. The SABC was requested to develop a turnaround plan to stabilise and place the corporation on a sustainable financial position going forward. The SABC had developed a Turnaround Strategy in November 2010 which identified six key areas through which the SABC would work. These included leadership and governance, financial management and controls, reorganisation and people alignment, human capital development, improved return on programming operations, and restoring credibility and branding. After disagreement on the financial projections, SizweNtsaluba VSP was appointed to review and give an independent opinion on the credibility of the projections and the underlying assumptions provided by the SABC. The SizweNtsaluba report concluded that the differences in the Government Guarantee targets and the projections were not ideal as it showed that there were inefficiencies when it came to the implementation to achieve the targets. The report said that it did not appear that the SABC would be able to meet the set Government Guarantee targets.

Cost-cutting measures within the SABC showed that the entity's headcount had been reduced by approximately 400 staff members from February 2009 to June 2011, due to stringent governance processes. Voluntary separation options such as voluntary early retirement and voluntary severance had to be offered before drastic measures were taken. The combined effect of cost-cutting initiatives resulted in a further reduction of R104m in terms of operation costs during the year ended March 2011. Employee compensation and benefits were reduced from R1 753bn in 2010 to R1 705bn in 2011.

The combined effect of various revenue enhancements would result in an increase in the revenue totalling at least R800m for the financial year ending 31 March 2012. DoC concluded that the implementation of the SABC’s turnaround strategy was heavily dependent on funding being provided by government. DoC agreed that based on the current review of the provided targets and forecasts, and given the history of the SABC meeting its budget, it did not appear that the SABC would be able to meet the Government Guarantee targets.

In its presentation, the SABC reassured the Committee that its Turnaround Strategy had already shown some improvement in the entity’s performance, as its financial challenges were being addressed. The SABC had reduced the amount of money owed to them by debtors by R150 m. It also enhanced its ability to broadcast and produce, increased its advertising and regained and improved its market share by 2%. The SABC was therefore able to continue as a going concern. The entity repaid R110m of its Nedbank loan ahead of schedule and its cash flow was stable. An improved cash flow meant that there was enough cash in the bank to continue operations. The SABC had over R500m cash available in the bank. The entity had also improved business efficiency and found easier ways of working in core functional areas. The SABC’s total revenue performance for 2010/11 had grown by 10% year-on-year. For 2011/12, the SABC had prepared a business case that sought to align the Government Guarantee financial targets with its own financial targets. Austerity measures that were implemented continued to bear fruits as expenditure was contained well within the budget. The SABC had continued to deliver impressive operational and financial performances. This was evidenced by the reduced operating loss R129m against the Government Guarantee target of R228m.

The SABC had made progress in turning around the organisation. In order for them to continue with these initiatives and remain a going concern, it was imperative that the funding request was approved. The SABC had achieved success on issues raised in the Auditor-General’s report. A performance management system was developed and training was underway, which enhanced the quality of reporting and effective governance within the SABC. A number of corrective actions were identified, which resulted in adequate leadership oversight. The broadcaster recommended that the Government Guarantee conditions be amended based on new forecasts as per actual results achieved in FY 2010/11 and the 36 month cash flow forecast model. For the SABC to meet its obligations in the normal course of doing business, the board believed that six key strategic initiatives had to be funded by the government. These included Digital Terrestrial Television (DTT), the development of sport and national interest, News 24, the national elections, retrenchment costs and the Digital Play-Out Centre and Digital Library.

National Treasury reported there had been improvement in the working relationship between the SABC and the Monitoring Task Team, with regular reporting being more forthcoming. However, the SABC had still not met three of its Government Guarantee conditions, which included:
• developing a detailed turnaround plan outlining milestones and executives responsible for the cost savings and revenue enhancement measures,
• implementing a plan for addressing the issues raised in the AG’s report, and
• cost-cutting and revenue enhancement measures to be captured in the shareholder compact.
The one condition the SABC had complied with was to develop the Monitoring Task Team to monitor progress on the turnaround plan. The SABC failed to achieve the committed changes in its cost structure and content savings were achieved at the expense of long term performance. National Treasury warned the Committee that the SABC’s financial sustainability was entirely dependent on receiving additional funding from government. However, additional information was required to get a more complete understanding of the SABC’s financial position. The DoC needed to assess the SABC’s Medium Term Expenditure Framework (MTEF) application and submit a request for funding for consideration in the budget process.

The Deputy Minister for Communications, Mr Obed Bapela, said that after listening to the three presentations, he had to ask whether they were “living in the same South Africa”. As the governing party, they also had to ask whose interests they were serving. SABC had a mandate to fulfil services for the poorest of the poor. Being a developing nation, one had to ask who should fund this particular mandate. He was worried about the statement made by Treasury, which was that the SABC was dependent on the state to bail it out. Such a statement should not have been made now. The discussion had to revolve around the loan as well as the public mandate elements of the SABC. There would be issues of leadership and service challenges, but the Committee should not lose focus of the public service broadcasting mandate. There had been a turnaround within the SABC and its recovery had started to look very positive. The broadcaster had been projecting sustainability and accountability. This would help the government to make more informed decisions in terms of funding for the SABC in the future.

The Committee expressed concern that things were not looking good for the SABC after they received National Treasury’s presentation. They did not understand why the Deputy Minister was surprised by what he heard as he was supposed to be part of the Monitoring Task Team that was set up to monitor progress on the SABC’s turnaround plan. Members reminded him that the majority of the Committee agreed there was a need to increase the SABC’s budget, but there was no way that they would approve the increase if there was no organisational structure within the entity. The year 2012 was around the corner and the SABC had not yet delivered on its previous resolutions. Members were concerned that to reduce the SABC headcount, government had to provide funds for severance packages. They were sure that there was a better way of cost-cutting than going to government to ask for funds for severance packages. The Committee thought that the SABC cutting content to up to R600m was quite disturbing; specifically with regards to the effect it would have on advertising and the fact that the current content was already very poor. Members were very worried that the broadcaster’s financial stability depended on government funding.

Although the Committee had heard the presentations, it still did not know what kind of communication the SABC was having with National Treasury, as the Committee received two very different stories from the two. It was clear the reports were not coordinated.

Members asked what the reasoning was behind reducing the headcount at the SABC and how it expected to implement it going forward, the degree to which the SABC expected to reduce the number of personnel, and how the reduction would affect its efficiency to provide the public with services. They also asked what had to be done to put the SABC on a sound financial footing, what the SABC would do if government decided not to bail them out, and where the DoC and the National Treasury were when the SABC failed to meet so many of its requirements. The only requirement that the SABC had met in terms of the Government Guarantee was the establishment of the Monitoring Task Team. The DoC, as the main shareholder, had to oversee the SABC as they knew the entity was troubled. It was DoC’s responsibility to ensure the SABC met its targets. With all these problems, the Committee wondered if it would be able to meet the targets for Digital Migration.

The Committee felt that it had been misled in the past. When the Committee endorsed the SABC Turnaround Strategy, it thought it would work. Now, it could see the targets were unrealistic and unachievable. The Committee could not support a blanket government bailout if the organisation had not touched on issues raised by the Auditor General such as lack of accountability, lack of fiscal discipline and adherence to National Treasury regulations, failure to conduct a needs analysis, acquisition of content from unauthorised suppliers, failure to declare business interests and exceeding various levels of authority. They wanted to know what measures the SABC implemented to curtail these serious issues of financial mismanagement and deficiencies.

Members were also concerned about the reduction the SABC had to make on operational expenditures. At the same time while retrenching people, some were still being hired again on a consultancy basis.

It was proposed that the Monitoring Task Team components - the National Treasury, DoC and the SABC - find consensus. The Committee did not want them to do away with the gaps that had been identified, as these had to be rectified but it wanted a report where the Monitoring Task Team spoke with one voice. The coordinated report must consolidate information contained in the SABC’s Turnaround Strategy, the Strategic Plan and the report on the Government Guarantee. The proposed retrenchments at the SABC were of great concern to the Committee and when the three entities returned to Parliament in mid October with an integrated document this had to be dealt with in detail.

Meeting report

Opening Remarks
The Chairperson welcomed the Department of Communications (DoC), the South African Broadcasting Corporation (SABC), the National Treasury (NT), and Deputy Minister Obed Bapela to the meeting.

He informed the Committee that there were two vacancies on the Media Development and Diversity Agency (MDDA) board that had to be filled by the end of the year. The matter was referred to the Committee to start the necessary process to fill the vacancies.

The Chairperson said that Mr Peter Harris had resigned as a board member of the SABC Board. The President had accepted the resignation and the Committee had to start the process of filling that vacancy as well. The Committee was trying to place adverts for both the MDDA and SABC board positions this weekend. He thought that three weeks was sufficient time to let the adverts run. He noted that the Committee agreed.

He informed the Committee that he had received a referral from the Speakers Office about South African Post Office (SAPO) workers working in Cape Town. The workers claimed that for the past fifteen or so years they had been classified as casuals. The Speaker referred the matter to the Committee to find solutions to the problem. As the matter included labour brokerage, the Committee could confer with the Labour Portfolio Committee. He found that there was no procedure in Parliament that spoke to how the Committee should deal with the matter. The Committee had to create its own process to deal with the problem. He understood that Members were not in a position to determine the way forward now, but he just wanted to table it before the Committee. The letter would be forwarded to the various parties. The Committee had to resolve the matter the next time they met.

Ms T Ndabeni (ANC) suggested that SAPO had to look at the letter so it could explain to Members the next time they came to Parliament what had happened and what was going to be done about the matter.

Mr C Kekane (ANC) asked if the Minister for Labour would give the Committee something in writing informing the Committee of how to remedy the problem. The Committee could also ask senior advocates within the Department of Labour (DoL) for advice on the matter.

The Chairperson replied that the Speaker, in his letter, had asked the Committee to confer with the Portfolio Committee on Labour as the matter dealt with labour brokerage issues. The Committee was already familiar with this SAPO problem. For the past four years, the Committee had told SAPO to sort out its temporary employment challenges. SAPO told the Committee that the matter was being resolved. It just so happened that the employees decided to lay a formal complaint against SAPO. The Committee would hear SAPO’s explanation when they engaged with them on a formal level.

The Chairperson reminded the Committee that they were supposed to receive a report on the matter of Local Loop Unbundling (LLU). The Department of Communications (DoC) and the Independent Communications Authority of South Africa (ICASA) informed him they were unable to prepare the report because of the processes they were currently engaged in about finding solutions to LLU. The DoC and ICASA requested the Committee to postpone the deadline to 26 August 2011 when the DoC would appear before the Committee to present its quarterly report. He had agreed to postpone the deadline on the Committee’s behalf.

Department of Communications (DoC) briefing on SABC Government Guarantee
Mr Sam Vilakazi, Acting Deputy Director-General: Finance and ICT Enterprise Development in the DoC, explained that in 2008 the SABC was engulfed in a governance crisis triggered by the fractious relationship between the Board and the Group Executive. In July 2009 the board was dissolved. The governance crisis period coincided with the 2008/09 global financial and economic crisis. For the 2008/09 financial year, the SABC reported a deficit of R910m. Subsequent investigations pointed towards poor governance as a serious contributor to the poor financial performance of the SABC. A task team appointed by the Minister of Communications established that the SABC probably went beyond revenues that did not materialise. The crisis was a result of gross financial mismanagement of escalating operational costs, and substantial discounts offered to customers and contracts that were unfavourable to the SABC for purchase of content.

In July 2009 the National Assembly announced its amendments to the Broadcasting Act to facilitate the resolution of the governance impasse. Board members began to resign one by one and an interim board was appointed for six months. The interim board approached government for financial assistance especially to enable the SABC to honour its debts as they became due for payment. The government agreed to provide the SABC with a cash allocation of R200m from the 2009/10 Adjustment Estimates Budget. In addition to this, a Government Guarantee (GG) of R1.473bn was granted to allow the SABC to borrow money from the financial markets.

The conditions of the GG stated that explicit revenue enhancement measures had to include achieving revenue potential from advertising, receiving sponsorship revenue, reviewing the SABC's sports strategy, and reviewing the implementing the corporate governance and procurement policies and procedures. The GG conditions said that explicit cost-cutting measures had to include content restructuring, right-sizing the organisation, reviewing professional fees, and reviewing other costs.

The GG conditions also stated that the SABC had to develop, in conjunction with the DoC, a project plan with completion milestones, timelines, and the executives responsible for the achievement of each of the identified cost saving and revenue enhancement initiatives. The plan was to form a basis for monitoring on a monthly basis these cost-saving and revenue enhancement initiatives. The SABC had to take corrective action to address issues identified in various reports that include the Auditor-General and Ministerial Task Team reports. The commitment made by the SABC was to be captured in the shareholders compact to be signed between the Minister of Communications and the Chairperson of the Interim Board of the SABC. Another GG condition was that a Monitoring Task Team (MTT) had to be set up comprising of the SABC, the DoC and Treasury. It would be constituted to receive and consider monthly performance progress reports to be produced by the SABC. The MTT would make recommendations to the Minister and inform the Minister of Finance as part of its performance monitoring duties.

The GG submission included three scenarios [see presentation]. The SABC chose the Base Case Scenario as a basis for applying for the GG. The SABC was requested to develop a turnaround plan to stabilise and place the corporation on a sustainable financial position going forward. The SABC developed a turnaround plan in November 2010. The Turnaround Strategy identified six key areas through which the SABC would work. These included leadership and governance, financial management and controls, reorganisation and people alignment, human capital development, improved return on programming operations, and restoring credibility and branding. The SABC identified approximately 108 projects that needed to be implemented in order to achieve its objectives. The turnaround project resource requirement was reviewed and budget requests were made. The project management office and the governance structures were set up. After disagreement on the financial projections, SizweNtsaluba VSP was appointed to review and give an independent opinion on the credibility of the projections and the underlying assumptions provided by the SABC. The SizweNtsaluba report concluded that the differences in the GG targets and the projections were not ideal as it showed that there were inefficiencies when it came to the implementation to achieve the set targets. A consistent process was needed to identify where GG was matched to the projections. The report said that it did not appear that the SABC would be able to meet the set GG targets.

Cost-cutting measures within the SABC showed that the entity's headcount had been reduced by approximately 400 staff members from February 2009 to June 2011, due to stringent governance processes. Voluntary separation options such as voluntary early retirement and voluntary severance had to be offered before drastic measures were taken. The combined effect of cost-cutting initiatives resulted in a further reduction of R104m in terms of operation costs during the year ended March 2011. Employee compensation and benefits were reduced from R1 753bn in 2010 to R1 705bn in 2011. The SABC received an additional R115m from outsourcing sponsorship revenues. They wanted to increase the TV Licence tariff subject to broad approval. The combined effect of various revenue enhancements would result in an increase in the revenue totalling at least R800m for the financial year ending 31 March 2012.

The SABC derived its revenue from advertising, sponsorship, trade exchanges, licence fees, government grants, content and commercial exploitation and other revenues. The main contributing revenues were advertising, licence fees and sponsorship. The bulk of the SABC's expenditure included employee compensation and benefits (32%), amortisation of programmes, film and sports rights (31%) and signal distribution and linking costs (9%). The SABC's total revenue for 2010/11 amounted to R5 293bn, almost on par with the expected budget of R5 306bn. The improved performance was due mainly to the FIFA World Cup. In respect of the GG, sponsorship revenue fell short by R123m. Licence fees fell short of the GG target by approximately R61m. The total expenditure for 2010/11 amounted to R5 328bn, almost on par with the budget of R5.308bn. The total expenditure was better than the GG target of R5 583bn. There had been a decline in the headcount of the SABC from 4125 in February 2009 to 3677 in June 2011. Employee compensation fell short of GG targets by R229m.

In terms of the 2011/12 first quarter performance of the SABC, the total revenue was R1 352bn and matched the budget for the period. Advertising revenue amounted to R955m and exceeded the budget of R905m by 6%. Sponsorship revenue amounted to R107m, higher that the budget of R89.4m by 20%. Licence fees amounted to R198m and were lower than the budget as well as that of the prior years by 10% and 2% respectively. Total expenditure amounted to R1 143bn and was lower that the budget and the expenditure recorded for the same period last year by 18% and 12% respectively. Employee compensation and benefits performed lower than the budget of R392m versus R438m.

A 36-month cash flow projection was developed, which was based on the assumption that the SABC would be making significant investment driven by the era of digital media. Without government funding, the SABC projected that cash flow would deteriorate to R3,7bn at the end of the 36 months even if the turnaround was achieved. The SABC then recommended scenario four, which included the combination of the turnaround achievement and the government funding.

The evidence in the presentation suggested that the SABC was on the right track in meeting the conditions of the GG. The income statement of the SABC suggested an improved performance. The SABC would have a negative cash flow from 2012/13 to 2013/14. Without government funding, the SABC projected that cash flow would deteriorate to R3,7bn at the end of the 36 months even if the turnaround was achieved. In its monthly reports to the MTT, the SABC highlighted that sponsorship revenue presented a challenge. Overall, the total revenue of the SABC lagged the GG target by R275m. A comparison against the GG conditions as reflected in the base case scenario preferred by the SABC and accepted as a basis of granting the GG, revealed that only employee compensation and benefits, broadcast costs, and professional and consultation fees performed worse than the GG targets. All other major expenditures in the year ended 31 March 2011 performed better than the GG targets. The actual performance of the SABC had been a loss of R129m. While the SABC may be said to be improving, there remained some challenges that had to be addressed if there was to be a level of comfort with its performance. With respect to the implementation of the turnaround strategy, it seemed that the SABC had identified the right interventions needed to bring stability to the organisation. However, going forward, the implementation of the turnaround strategy was heavily dependent on funding being provided. Based on the current review of the provided targets and forecasts, and given the history of the SABC meeting its budget, the Department of Communications said that it did not appear that the SABC would be able to meet the Government Guarantee targets.

South African Broadcasting Corporation briefing
on the Government Guarantee conditions
Dr Ben Ngubane, Chairperson of the SABC Board, told the Committee that the application for a Government Guarantee (GG) made by the Interim Board on 9 October 2009 detailed the funding requirements to maintain the SABC as a going concern. The requested GG amount was R1.473bn and was additional to the R200m allocation to the SABC in the 2009/10 Adjustment Estimates of National Expenditure. The GG application was based on the SABC's Corporate Plan, which dealt with the organisation's key performance areas for the Medium Term Expenditure Framework (MTEF) Period 2009 - 2012. It also articulated a turnaround strategy designed to stabilise the SABC and return it to profitability by 2012, while fulfilling the SABC's Public Broadcast Mandate. It was intended that the GG be used to secure medium-term funding from commercial banks, funding which would restore liquidity to the organisation and enable the sign-off of the SABC's Audited Financial Statements and the external auditors' report, for the year ending March 2009. The request for the GG met the requirements of the Public Finance Management Act (PFMA) as well as Treasury regulations and the application supported the SABC's mandate, its objectives and those of government as a whole. 

Ms Rosey Sekese, DoC Director-General, focused on the strategic drivers from four perspectives. The first was the financial perspective, which looked at the lack of funding, commercial sales and cost efficiencies. These factors resulted in the SABC experiencing financial instability and feeling like its financial viability was being threatened. The second perspective looked at opinions from external stakeholders such as the government, the public and international groups. The view was that the SABC had ineffective brand and image management, and that its reputation was at risk. The third one, the internal business perspective, showed that the SABC had conflicting and often competing business objectives. A resource perspective showed that enabling and support structures were suboptimal. The SABC reassured the Committee that its Turnaround Programme had already shown an improvement in each of the above perspectives and would continue to drive improvements for the SABC.

Mr Phil Molefe, SABC Acting Group Chief Executive Officer, discussed the SABC’s financial achievements. He said the SABC’s financial challenges were being addressed. It had reduced the amount of money owed to them by debtors by R150m. It also enhanced its ability to broadcast and produce, increased its advertising and regained and improved its market share by 2%. The SABC was able to continue as a going concern. The entity repaid R110m of its Nedbank loan ahead of schedule. The SABC’s cash flow was stable. An improved cash flow meant that there was enough cash in the bank to continue operations. The SABC had over R500m cash available in the bank. The entity also improved business efficiency and found easier ways of working in core functional areas. It had a focused and motivated management team and enhanced its support functions such as human resources and finances to enable SABC to better achieve its primary goals.

The past fiscal year had seen the entity attain other major achievements. The SABC’s Turnaround Strategy was approved, its recovery was achieved, and the entity was now in its stabilisation phase. A plan of action was established to address the recommendations in the Auditor General’s report. A revised operating model and structure was developed, and was currently being considered by the board. In terms of stakeholder relations, the SABC held consultations with the Ministry of Sport and Recreation and the Portfolio Committee on Sport and Recreation on the development of a new sports strategy. Commercial relationships were stabilised as well as international content supplier relationships and local content relationships. Some examples of broadcasting successes was SABC’s delivery on its language and local content mandate, the Cricket World Cup, coverage of the Local Government Elections, and re-launching digital media platforms.

Mr Lerato Nage, SABC Chief Financial Officer, gave the background to the GG. He looked at current and projected performance of the SABC against the requirements of the GG. The SABC had made a profit of R93m in 2008, then a loss of R790m in 2009 as a result of operating expenses and employee costs which had risen drastically as well as various operational and management inefficiencies. Cash flow problems prevented the organisation from honouring payments of its committed contracts and commissioned local content productions. The Interim SABC Board at the time secured a GG to the value of R1 473bn from the National Treasury in order to obtain a term loan from Nedbank. The initial R1bn was used to eliminate the solvency crisis the SABC experienced in 2009/10. The amount funded was conditional on meeting strict conditions and criteria set by National Treasury. The remaining R473 million would be made available on meeting additional requirements, however the SABC would not be accessing this additional facility.

The SABC’s total revenue performance for 2010/11 had grown by 10% year-on-year. For 2011/12, the SABC prepared a business case that sought to align the GG financial targets with its own financial targets. Austerity measures continued to bear fruit as expenditure was contained well within the budget. The SABC had continued to deliver impressive operational and financial performances. This was evidenced by the reduced operating loss of R129m against the GG target of R228m.

In terms of the SABC’s financial performance against the GG, it showed that there was no major variance from the advertising revenue in 2010/11, but market fragmentation continued to affect advertising revenues in 2011/12. In 2010/11 the compilation of the sponsorship targets in the GG targets was incorrect. The market perceived SABC sponsorships as expensive. This also applied to the 2011/12 financial year. Employee compensation and benefits performed R229 million below GG targets in 2010/11. This line item was head count related. The current 2011/12 budget was based on reduction of headcount and conversion to cost-to-company packages. In 2010/11 and 2011/12 there was a delay in the finalisation of the debt collection tenders, resulting in targets not being met for TV licence collection costs. In 2010/11 finance costs performed favourably against set targets as the SABC did not require the second tranche of the GG which was included in the set targets. For 2011/12 finance costs had been budgeted below set targets as the SABC would not require the second tranche of the government guarantee included in the targets.

A number of 36-month cash flow scenarios were modelled by the SABC. The four scenarios clearly indicate the benefits of the turnaround work currently underway and the need for the MTEF funding requests to be approved. The first scenario included a base case scenario that assumed the achievement of the turnaround. A second scenario was the base model that excluded the turnaround achievements. A third scenario included the turnaround achievements and excluded MTEF funding. The last scenario included turnaround achievements and MTEF funding. The main assumption for all four was that the SABC would be making significant investment driven by the era of digital media. In each of these scenarios, the SABC would be required to repay the R1bn Nedbank loan. In all four scenarios the SABC would have liquidity pressures for 2012/13 and 2013/14 as the cash would be below the safety level of R300m. With regard to the first three scenarios (the blue, red and grey graphs), the SABC would have a negative cash flow from 2012/13. Without government funding, it was projected that the cash flow would deteriorate to R3.7bn at the end of the 36 months even if the turnaround was achieved. The SABC, therefore, recommended scenario four (green graph), which included the combination of the turnaround achievement and government funding. With implementation of scenario four, SABC would achieve the cash safety level of R300m in mid 2013/14.

The SABC had made progress in turning around the organisation. To continue these initiatives and remain a going concern, it was imperative that the funding request was approved. The SABC had achieved success on issues raised in the Auditor-General’s report. A performance management system was developed and training was underway, which enhanced reporting quality and effective governance. A number of corrective actions were identified, which resulted in adequate leadership oversight. Four areas were identified for cost reduction: reduction of operational expenditure, head count reduction, conversion to total cost-of-employment, and reduced leave liability. The combined effect of these cost cutting initiatives was a further reduction of R104 million of operational costs for the year ended 31 March 2011. Over the past two fiscal periods, operational expenditure had decreased by 36% (as per audited financial statements). Revenue enhancement initiatives included implementing a trading and pricing model, developing a yield strategy, outsourcing sponsorship revenues, increasing TV licence fees, and receiving a government subsidy. The combined effect of this would result in an increase in revenue totalling at least R800 million (as per budgeted figures) in 2011/12. The key intent was to naturally curb the growth in the long term liability. One way of doing this was through Total Cost-of-Employment, where benefit costs would be capped and any increases in excess of the company contribution were funded by the employee. Consultation had begun and as a result benefits were starting to be realized. Employee compensation and benefits had reduced from R1 753 billion in 2010 to R1 705 billion in 2011 (as per audited financial statements).

Dr Ngubane said that in order for the SABC to meet its obligations in the normal course of doing business, the board believed that six key strategic initiatives had to be funded by the government. These included Digital Terrestrial Television (DTT), the development of sport and national interest, News 24, the national elections, retrenchment costs and the Digital Play-Out Centre and Digital Library. Based on the evidence presented it was obvious that the SABC continued to improve its performance both in terms of revenue and cost reduction. The SABC had prepared a business case that outlines its optimal performance for the next few years. The next step was to align the GG targets with the operational and financial performance of the SABC (as outlined in its 36 month financial performance projections). The SABC recommend that the Government Guarantee conditions be amended based on new forecasts as per actual results achieved in 2010/11 and the 36 month cash flow forecast model.

National Treasury briefing on the Government Guarantee conditions
Ms Avril Halstead, NT Chief Director: Sector Oversight, said the presentation was based on reports received from the SABC. Submission dates for SABC reports to the Monitoring Task Team and MTT monthly meetings had been agreed for the rest of 2011. A CFO report, divisional income statements, a turnaround strategy executive project update, and a performance review report would be submitted on a monthly basis. The MTT had also received a corporate plan missing three-year financial projections, 36 month cash flow projections and a turnaround strategy executive project update from the SABC. The SABC submitted an MTEF application to the DoC and the NT. However, there were still inconsistencies in the information that was communicated to government.

The SABC had still not met three of its GG conditions, which included developing a detailed turnaround plan outlining milestones and executives responsible for the cost savings and revenue enhancement measures, implementing a plan for addressing the issues raised in the Auditor General’s report, and cost-cutting and revenue enhancement measures to be captured in the shareholder compact. The one condition the SABC complied with was to develop the MTT to monitor progress on the turnaround plan.

The SABC failed to achieve the committed changes in its cost structure. These cost-cutting and revenue enhancement initiatives included advertising revenue enhancements, increased sponsorship revenue, a decrease in people costs, a reduction in professional fees, increased expenditure on marketing, improved licence fee collection, and other costs. The only change the SABC achieved was to enhance content management by R336m. Content savings were achieved at the expense of long term performance.

The SABC was in the process of proposing amendments to the cost cutting and revenue enhancement initiatives committed to when applying for the GG and which was the basis for the guarantee being issued. The entity was also proposing that the guaranteed loan be restructured. A request to amend initiatives and to restructure the loan was to be submitted by SABC with a revised turnaround plan to the Ministry of Communications and the Ministry of Finance for approval. The turnaround plan had to be in line with GG requirements and had to address the issues raised in the AG’s report. The SABC Board was in the process of drafting a proposed shareholder compact. If approved, the shareholder compact, which was based on the turnaround plan, could be finalised.

The SABC’s capacity to meet its obligations was entirely dependent on the MTEF funding. The DoC needed to assess the SABC’s MTEF application and submit a request for funding for consideration in the budget process. For the 2012 Budget, the focus was on finding savings and reprioritising spending as very little additional funding would be made available. The SABC’s request for funding in 2011/12 could not be considered as additional funding was only for unforeseen and unavoidable expenditure. The Business case for News24, Sports channel and DTT was still outstanding. Funding requests were to cover operational expenditure (for DTT, SABC had committed that the company would cover all operating expenditure and would only require funding for capital expenditure). To get a more complete understanding of SABC’s situation, the MTT had requested that SABC submit information that was still outstanding such as the business plans for News24, DTT and the sports channel, the turnaround strategy for SABC 3 and the link to content procurement, SABC’s proposal for restructuring the Nedbank Loan, a consolidated turnaround strategy, a project plan and progress report on initiatives to address the AG’s recommendations, a separate reporting of public and commercial broadcasting businesses, and monthly reporting on risks and mitigating actions being taken by the SABC.

National Treasury noted that there had been an improvement in the working relationship between the SABC and the MTT, with regular reporting being more forthcoming. The SABC was still not meeting most of the guarantee conditions. The SABC’s financial sustainability was entirely dependent on receiving additional funding from government. However, additional information was required to get a more complete understanding of the SABC’s financial position.

Discussion
The Chairperson informed the Committee that Deputy Minister Bapela had to leave the meeting very shortly. He invited the Deputy Minister to say a few words before he left.

Deputy Minister Bapela said that after listening to the three presentations, he had to ask whether they were “living in the same South Africa”. They seemed to be projecting different “worlds in South Africa”, which was a developing nation with poverty, inequality and unemployment. As the governing party, they had to ask whose interests they were serving. Were they serving the interests of the poor? The governing party was an institution with a public mandate to serve the poor. The SABC had a mandate to fulfil services for the poorest of the poor. Being a developing nation, one had to ask the question who had to fund this particular mandate. Last week the Minister was in the United Kingdom and found that the BBC public mandate from government was 100% funded. South Africa and the UK were two different nations. When the BBC came to its Parliament, its members just wanted to know how they spent the money government gave them in fulfilment of its public service broadcasting mandate. It was not about how much money they needed or how much they had to borrow from commercial banks. It seemed that here in South Africa, we were living in different worlds as one government, as political parties and as individuals. He was not saying that the SABC should deviate from the loan it was given, as there were certain conditions attached to the loan that had to be fulfilled. The governing party had taken a resolution in Polokwane in 2007 to fund 60% of the public broadcaster’s mandate. He was not sure how much the government funded the SABC now, but the broadcaster ended up going to a commercial bank for a loan. It was quite worrying that at one point there were issues of leadership and organisational instability within the SABC. Even when government was discussing how much to fund the SABC at that point in time, anyone could have gotten worried and wondered why they had to give money to an entity that could not take care of public money. However, there had been a turnaround within the SABC and its recovery had started to look very positive. The broadcaster had been projecting sustainability and accountability. This would help government to make more informed decisions in terms of funding for the SABC in the future. The government also had to contribute to ensuring that the SABC had better organisational capability. He was worried about the statement made by National Treasury, which was that the SABC was dependent on the state to bail it out. Such a statement should not have been made now. He did not know if the SABC would be able to account for the money it spent. Another nation that funded its broadcaster fully was Lesotho. They were a poor nation, but they could do it. South Africa seemed to be in a different world. Obviously, the government had to look at the loan and what was going to be done about it, but government also had to plan and prepare for the future. The discussion had to revolve around the loan as well as the public mandate element. There would be issues of leadership and service challenges, but the Committee should not lose focus of the public service broadcasting mandate.

Ms Ndabeni commented that the Deputy Minister raised some critical issues. However, she did not understand why he was surprised by what was said in the National Treasury’s presentation, as she assumed he was part of the MTT. If the Deputy Minister received the presentation from the NT prior to the meeting, he could have told them his thoughts. She reminded him that the majority of Members at the meeting agreed there was a need to increase the SABC budget, but there was no way that they would approve the increase if there was no organisational structure within the entity. The year 2012 was around the corner and the SABC had not yet delivered on its previous resolutions. Members owed it to their constituencies to ensure that Government would deliver on what it had promised.

Ms N Michael (DA) said that things were looking very good for the SABC until the National Treasury’s presentation. Suddenly, things were not looking good for the broadcaster. She was concerned that the SABC had to reduce its headcount, and that government had to provide funds for severance packages. She saw this as “cutting off our nose to spite our face”. The government promised people millions of jobs and now they had to pay substantial severance packages. This was not a win-win situation, as at the same time that people were being retrenched, government had to give money towards large severance packages. She was sure there was a better way of cost-cutting than going to government to ask for funds for severance packages. She asked what the reasoning was for reducing the headcount and how they expected to implement it going forward. She wanted to see the model for the proposed loan restructuring. National Treasury said they had seen it but did not quite understand it, which meant there was a very slim chance she would understand it. But, it was important for the Committee to see it. She thought that cutting the content budget up to R600m was quite disturbing; specifically with regards to the effect it would have on advertising. She always thought the SABC had a very sharp advertising plan. The SABC could not afford to cut content, as the current content was already very poor. There was a very good reason that people had DSTV. It was because SABC’s content was bad. People were lucky if they switched on the TV and the SABC was playing Bruce Lee movies from 1982. The sport content was not of a high enough standard and it was not fair to the people of South Africa. The Deputy Minister was concerned that the SABC’s financial stability depended on government funding. He was not alone in this concern. There was no way that the SABC could continue being completely dependent on government funding. The idea was to get the loans paid off and to be operating at optimal level. This worried her. She noticed that the Deputy Minister was shaking his head. If she misinterpreted or misunderstood what he said then she would gladly hear what he had to say. She was happy to see the improvements made by the SABC. She applauded its efforts. Although the Committee had all the presentations, it still did not know what kind of communication the SABC was having with the Treasury. The Committee received two different stories from the SABC and National Treasury. It would help the Committee to know whether the two entities had a “meeting of the minds”.

Rev K Zondi (IFP) noted that certain SABC staff members were going to be retrenched. However, on the on the other hand, the SABC spoke of posts that remained vacant. To what degree was the SABC expected to reduce the number of personnel? How would this affect the efficiency of the SABC to provide the public with services? If the vacant posts were filled, would it increase costs that the SABC was trying to reduce? The SABC said it had a loss of R119m, but they had cash on hand of R500m. At face-value, the picture looked positive, but he wondered what other expenses the SABC still had to pay. What had to be done to put the SABC on a sound financial footing? The SABC was a public broadcaster and the pride of the country and the Committee did not enjoy seeing it turn to loans to keep afloat.

Ms B Tsebe (ANC) said that the SABC had to help the Committee to help them. The first thing it had to do was to accept it had problems. The presentation made by the SABC painted a nice picture of what was happening within the entity, but the presentation made by National Treasury said a different thing. If the SABC did not accept that they were still in “ICU”, they would not receive assistance. She asked the SABC to share with the Committee, its interpretation of National Treasury’s findings in terms of the entity meeting its GG. There was some truth to what National Treasury had told the Committee today. The only requirement that the SABC met in terms of the GG was the establishment of the MTT. The Committee had to wonder where the DoC was when all of this was happening. The DoC, as the main shareholder, had to oversee the SABC as it knew the entity was troubled. It was DoC’s responsibility to ensure that the SABC met its targets. This meant that the DoC was not doing its job. This also applied to Treasury, who should not have waited for the meeting today to give the Committee this information. What had National Treasury done to assist the SABC? Members, as South Africans, could not have the SABC “in the ICU”. In terms of the issues raised by the AG, there was a foundation laid by the interim board. The new board’s job was to build on the foundation. Today, the SABC should have told them who was suspended and how much money they had recovered. In one of the presentations it said that by 2014 the SABC would experience a cash flow problem. She wondered what the SABC was going to do if the government decided not to bail the entity out. With all the SABC’s financial problems, she had to wonder if it would be able to meet the targets for Digital Migration. She concluded that the DoC, the National Treasury and the SABC’s presentation were not coordinated.

Ms J Killian (COPE) said the comments made by the Deputy Minister were concerning, especially in terms of financial sustainability and performance against the GG and the set targets. It was important for the Executive to be aware of the difficulties experienced by the MTT in getting credible and realistic figures. It was important for the Executive to note that it would now have to treat the SABC as an entity in ICU. The debate about public funding was a future debate that had to be part of a complete revision of the Broadcasting Act, as the Committee could not change the mandate of the SABC just because it was finding itself in financial difficulty. The mandate and the funding model could be evaluated in a separate process, but measures would have to be put in place to ensure that the SABC was not being made the mouthpiece of a ruling party, be it the ANC or any other political party. From now on the SABC had to trust the Committee and give it full disclosure. This had not been the case over the past two years. If more money was thrown at this ailing entity, it would not rescue it. The basics had to be correct first. She asked how the SABC would be able to restore its credibility financially and perceptually. She also wanted to know how government could ensure that there was a public mandate that complied with the Constitution in terms of its principles of a public broadcaster. She gave the example of the Free State Premier’s PR being conducted by the anchor on Lesedi FM. It was important for the public broadcaster to show a complete independent picture of South Africa. The SABC could not have radio presenters conducting PR for the Free State Premier. In terms of the SABC’s finances, what were they talking about regarding MTEF funding? Were they talking about operational expenditure for DTT rollout? Were they talking about severance packages? As a Member of the Committee, she felt that the Committee had been misled in the past. When the Committee endorsed the SABC’s Turnaround Strategy, they thought it would work. Now, it could see that the targets were unrealistic and unachievable. The Committee could not support a blanket government bailout if an organisation had not touched on issues raised by the AG such as lack of accountability, lack of fiscal discipline and adherence to Treasury regulations, failure to conduct a needs analysis, acquisition of content from unauthorised suppliers, failure to declare business interests and exceeding various levels of authority. What measures had the SABC implemented to curtail these serious issues of financial mismanagement and deficiencies highlighted in the AG’s report? If the SABC wanted funding, they needed to put the appropriate systems in place.

Mr N van den Berg (DA) said that the Committee was aware of the SABC’s problems. The presentations were all about money, policies and structures. But, while the SABC was planning all these turnaround strategies, there were unhappy people working at the SABC at the moment, as they did not know if they would be retrenched. He asked what the SABC was going to do to turn this around. What would happen if the SABC did not have people to operate all its equipment? The SABC was its personnel. There were not many people that could do the things SABC employees could do. He asked what the SABC was going to say to its employees to reassure them, as they were shaken. SABC employees were insecure; they did not know how long the entity was going to exist.

Ms R Morutoa (ANC) agreed with the previous speakers. One of the conditions for the government guarantee was for the SABC to be in communication with the DoC. However, the Committee just received three very different reports. Things looked good for the SABC until National Treasury made its presentation. The report given to the Committee by the MTT should have included some of the information from National Treasury. One of the things the Committee was concerned about was how the Executive communicated to the Committee. It understood it was mandatory for the government to fund the public broadcaster; however, entities had to be accountable for the money they used. The MTT had to deal with such issues. She was also concerned about the reduction the SABC had to make on operational expenditures. At the same time as staff were retrenching people, some of these were still being hired again on a consultancy basis. She asked if the SABC could explain this. It was clear that there was no coordination between the SABC and Treasury.

Ms Ndabeni thanked the SABC Board for finally availing itself to the Committee. At some point she was worried that the board was not taking the Committee seriously. She was happy that it understood and respected the processes of Parliament and the lines of communication. Ms Killian mentioned that she did not want a broadcaster that was the mouthpiece of the ruling party. She was not sure what that meant. The reality was that President Zuma was the president of the ANC but he was also the president of the country, which meant that he had to be covered by the broadcaster. It was the ANC-led government that delivered services to the country so if a Minister or premier spoke to the public, it could not be helped that they were part of the ANC. It was understood that the SABC was a public broadcaster. Other political parties had to bear with this. She echoed the concerns about the three different presentations the Committee had received. She had many questions but it was not going to mean anything by the look of things. She proposed that the MTT go back with all of its components - National Treasury, DoC and the SABC - and find consensus. However, the Committee did not want them to do away with the gaps that were identified, as these had to be rectified. Members wanted a report where the MTT spoke with one voice. She understood that bilaterals were normally held but if these bilaterals did not seek to assist the SABC then they had to be done away with. The next time they came to Parliament they had to be completely honest with the Committee. The GG document specifically showed who was responsible for the money in terms of the MTT. She asked how seriously the task of delegating money was being taken. The Deputy Minister raised a concern about the comments made by National Treasury. The Deputy Minister was supposed to be part of that MTT so if he was concerned - she was not sure how the Committee should feel. She appealed to the Committee to let the DoC, National Treasury and the SABC go back to work on a coordinated report to be presented to the Committee. Members wanted to see that the SABC was delivering on its targets. The Committee could amend the appropriate Acts if they wanted to but they could not move for this if the SABC was not quite in order. Members had to agree to give the three stakeholders a timeframe to return to the Committee with a consolidated, coordinated report that showed where the SABC was in delivering on its targets. The Committee would make the appropriate interventions needed if they saw the SABC was failing to deliver on its goals. Members wanted to know what was happening, where the SABC was going wrong and what the Committee needed to do to help the entity.

The Chairperson thanked Ms Ndabeni for her proposal. He added that the Committee wanted a coordinated report from the DoC, National Treasury and the SABC that consolidated information contained in the SABC’s Turnaround Strategy, the Strategic Plan and the report on the GG. Another issue that was of great concern to the Committee were the retrenchments at the SABC. When the three entities returned they needed to have an integrated document showing how they were going to deal with the matter, how they arrived at the figures for retrenchment, and whether certain staff members were going to be trained so they could take up alternative opportunities offered to them.

Ms Ndabeni noted that the SABC could not be hiring more people while they were in the process of retrenching other employees. When an entity was in the process of retrenching people, the only vacancies they needed to fill were the really important ones such as Chief Executive Officer.

Ms Killian said that she wanted to see real figures in the report that conformed to Treasury regulations and the loan requirements. The Committee also needed more transparency in terms of the risk that the SABC entered into when it took the loan.

Ms Morutoa recommended that the Committee give the entities a month to produce the report.

The Chairperson asked if the rest of the Committee agreed with the recommendation.

Ms Sekese asked if the Committee could extend the deadline to the end of September.

Mr Molefe replied that it would be preferable to move the deadline to 15 October 2011.

Ms Killian answered that she was okay with Mr Molefe’s suggestion.

The Chairperson noted that the Committee was in agreement that the deadline would be mid October. Members would decide the exact date in October at a later date.

The meeting was adjourned.

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