SA Post Office on its Annual Report and status update; State of Nation Address implications for telecommunications: Parliamentary Researcher briefing

Meeting report

South Africa Post Office (SAPO): Annual Report and financial statements and current issues
Dr Simo Lushaba, Administrator, South African Post Office, mentioned that the entity (SAPO); currently operated in a challenging environment affected by a steady decline in mail volumes and steep competition in non-regulated services, mirroring global trends. Mail revenue still represented over 65% of the SAPO business, and if the declining trend continued, the SAPO could neither deliver on its mandate nor be commercially sustainable. A commercially viable and stable Postal Service remained vital to furthering government’s objectives of creating an inclusive economy, creating jobs and expanding services to rural and under-serviced communities. The SAPO would "fail and implode" without a comprehensive business turnaround programme. The objective of the turnaround plan was to alleviate the loss, return the organisation to profitability, and transform SAPO into a strong and vibrant organisation that would be better positioned to respond to market changes and customer needs.

The South African trend of declines in mail volume mimicked global trends, albeit at a faster rate and this fact, combined with the reliance of the SAPO revenue mix on mail business, left SAPO severely exposed. Global operators had responded to declining mail volumes by re-inventing their business models and revenue mix. The postal services in general, however, remained under pressure with plummeting mail volumes and revenue. The drop in customer volumes in South Africa had been exacerbated by repeated industrial action and consequently unreliable mail delivery. The SAPO had been through another challenging year with slow economic recovery and increasing financial pressures. The rapid evolution within the digital space was shrinking mail revenue as customers seek faster communication media, leaving SAPO with high fixed costs. The mail revenue continued to be the key generator by contributing 67% of the Group’s overall revenue. It was important to highlight again that the impact of the four labour strikes over the past year played a major role in missing the revenue budget and poor service delivery to customers.

Dr Lushaba stated that despite receiving no subsidy for the extension of the Universal Service Obligations (USO), SAPO opened 50 postal outlets, increasing the Post Office branch network to 2  486 offices. The addressed expansion programme had seen 1 197 254 new addresses rolled out, bringing the total addresses in use to 12 387 000. During 2014 about 50 million customers were served at the various post offices. A total of 3.4 million customers renewed their motor vehicle licenses through the post office branches. In Limpopo 6.3 million books had been delivered to 3 975 schools and in Northern Cape 900 000 books had been delivered to 575 schools.

Mr Lenny Govender, General Managing Director: Finance, SAPO, mentioned that there had been 5% decline in mail volume and e-Business growth of R111 million, mostly coming from Administrative Adjudication of Road Traffic Offences (AARTO) Act, Johannesburg Metropolitan Police Department (JMPD) and South African Social Security Agency (SASSA). There had been revenue growth of 2% on courier. However staff costs were a concern, having increased by 9% (annual increase and conversion cost). The property cost increased by 7% and interest, whilst the actuarial valuation decreased by R119 million. In logistics revenue, there was a marginal growth of 2% (volume decline and price increase) and retail revenue. Motor vehicle licensing revenue increased from R32 million to R205 million. The Postbank revenue declined from 5% in 2013 to 4% in 2004. There was a slight decline in mail revenue from 68% in 2013 to 67% in 2014, while interest and sundry remained stable at 7%. 

Mr Govender highlighted that staff costs was still at R3.7 billion and this increase was due to annual increase and conversion. The transport costs were around R747 million and the SAPO was hoping to optimise the National Linehaul expenditure. The property expenses were around R697 million with an increase of R48 million. The rental cost increased by R33 million to R353 million (annual escalations and new rentals) and maintenance cost increased by R5 million to R87 million. Utility costs increased by R10 million to R180 million and material and services expenses were R279 million. The software cost increased from R14 million to R108 million.

The total assets of SAPO increased by R530 million (5%) and the deferred tax increased by R146 million. The heritage assets were R22 million (first time recognition) and cash and short terms investments increased by R308 million. The current assets included investments and cash of R6.4bn to match depositors funds of R4.7 billion included in current liabilities. The total equity and liabilities increased by R530 million (5%). The non-distributable reserves for the Postbank funding of R205 million to be converted into share capital and retained income decreased due to net loss. There was an increase in current liabilities from trade and other payables of R106 million, and Postbank depositors' funds of R245 million.

The Audit Opinion showed that SAPO initially had an adverse opinion without the issue of the R1.67 billion guarantee. The emphasis of matter was on material uncertainty which may cast significant doubt on the entity’s ability to continue as a “going concern”, and it was important to stress that this was the reason given by the auditor for issuing the adverse opinion. An adverse opinion will almost certainly result in rejection of the organisation's financial reports by the investment community, lending institutions, regulatory bodies, and governments. Because SAPO was a payment channel for third parties this would have had a negative impact. Creditors would have negotiated the payment terms to a cash basis.

Mr Govender pointed out that the SAPO overdraft facility of R50 million with Standard Bank had been extended to R320 million, thus increasing the borrowing limit by R270 million. The National Treasury (NT) approval was conditional upon SAPO achieving the R277 million budget savings and cost cutting measures on the three key cost areas. Standard Bank required the guarantee to secure the facility, due to SAPO’s weak financial position, and the Department and National Treasury had issued a guarantee in the amount of R270 million for the overdraft facility. This facility was an interim measure to meet salary and creditor obligations, after SAPO had suffered revenue and customer losses as a result of the prolonged industrial action. When the external auditors raised the matter of “going concern” it had prevented the finalisation of the annual financial statements for the financial year ended 31 March 2014. SAPO failed the commercial solvency test and the projected cash flows showed that there was a continuing challenge around it meeting all financial obligations. The NT had given SAPO a guarantee of R1.6 billion during December 2014, which provided the assurance to the auditors to sign the 2014 audited financial statements.

The industrial action extended over four months, until 26 November 2014, and the violent nature of the strikes had traumatised employees to whom assistance was provided. Seven arrests had been made and 6 perpetrators were convicted and other arrests were imminent. The formulation of the Leadership Forum was meant to negotiate with labour. The Commission for Conciliation, Mediation and Arbitration (CCMA) had agreed to assist with commissioners to further negotiate. The dynamics within and between the unions were volatile and unstable. The SAPO Board resigned on 7 November 2014. In terms of section 25 of the Post Office Act 22 of 2011, the Minister of Telecommunications and Postal Services, Dr Siyabonga Cwele, appointed Dr Simo Lushaba as the Administrator. The Deputy President, Mr Cyril Ramaphosa, had been allocated the oversight function for SAPO. The Auditor-General (AG) had been appointed to take over the SAPO audit. The Postbank IT upgrade of approximately 64 000 accounts overdrawn, to the value of R5 million and +R600 000 had been recovered, and application control measures were put into place.

The overview of current status showed that the labour environment was now stable, as employees had returned to work. However, there were still challenges in the implementation of agreements with unions. The SAPO still had a backlog of 3.2 million items to process at 10 February 2015, and the revenue recovery remained slow, which decreased cash inflows to meet supplier and employee back payments. The management was currently implementing additional budget savings and cost containment measures to deal with the backlog.

In order to ensure a stable labour environment and improve labour relations there needed to be an establishment of consultative / negotiation forums and labour agreements to ensure implementation. There was still a battle to resolve salary disparity, and a detailed productivity analysis was still in progress. The process to finalise employment contracts for casual employees was currently under way. The Critical Executive vacancies were still to be finalised, once the entity had reached stability.

Dr Lushaba highlighted that SAPO Group posted a net loss of R964 million for the period ended 31 December 2014 and revenue performance remained weak at R1.17 billion below budget, and a decline of R601 million (14%) from prior year. The cost management yielded good results in that SAPO remained below budget by R397 million and up R31 million (1%) on prior year. Seasonal box rental revenue had been delayed and should show an increase from January 2015.

It was important to highlight once again that the weak financial results added further pressure to the strained cash flow position. The cash flow crisis showed that R134 million monthly net cash contribution generated from operations (after salary fixed costs), together with unutilised bank overdraft of R67million, was not sufficient to settle the current trade liabilities of R635 million. 85% of the total trade liabilities amount of R635 million was past the payment-due date of 30 days and had in fact been unpaid for more than three months. The declining revenues would not match the fixed operating costs, so there would be no available cash from operations to fund both the current and backlog supplier obligations. SAPO also still had an obligation to convert casual staff to permanent,  and implement other labour agreements, but this was currently unfunded.

Dr Lushaba took the Committee through key priorities for the SAPO, which were to:
 

• Ensure organisational stability
• Improve labour relations
• Speed up the urgent recruitment of critical positions.
• Increase frequency of communication to staff and customers
• Develop effective change management processes for staff to cope with change
• Implement a new business model that would meet customer needs
• Exploit revenue growth opportunities, especially in the digital space
• Deliver on the Strategic Turnaround Plan (STP)
• Focus on the Postbank Corporatisation
• Deal with Licence application

In conclusion, the turnaround strategy showed that at the heart of the funding problem lay the juxtaposed goals of socially driven service requirements and the business reality of profits and funding. The funding gap to be filled, to put SAPO on the road to recovery, was about R1.8 billion, assuming the business returned to profit by March 2015. This excluded funding required to recapitalise the Courier Freight Group (CFG).The USO requirements created massive financial strain in addition to losses incurred by established non-USO branches, mainly due to poor management decisions. Capital markets would be extremely hesitant to lend funds to SAPO, given the solvency problems, operational concerns and labour issues, as well as the reality that the business did not generate sufficient cash flows to service any level of debt. Since Postbank was still profitable, the market was likely to be willing to use it, but only if it became legally ring-fenced and financially independent from the rest of SAPO.

Discussion

Mr C Mackenzie (DA) welcomed the presentation and indicated that there had been lot of changes since Dr Lushaba took over. The entity was gradually starting to move from its complete crisis, and the Annual Report had be. Then tabled, although it was actually quite irrelevant to what was currently happening at SAPO as this is shown by a loss of R360 million in 2014 to a projected loss of R1.3 billion in the year 2015.

The decline in the mail volumes had been happening since 2008 without any turnaround strategy to deal with this crisis and it would be unfair to blame the new management for this mess. The previous Board members who had resigned still had many answers to give to the Committee in terms of the performance of the SAPO. Clearly, if it had not been for the intervention of government in terms of funding, the entity would have received an Adverse Audit Report on the finances. It was of concern that the previous Board members attended 21 Board and Committee meetings, as this meant more time was spent on expensive meetings than doing the actual work. He wondered if there were actions that could be taken against previous Board members for their neglect of responsibilities.

Mr Mackenzie inquired whether there was a strategy in place to deal with payment to suppliers, as this was listed as the problem in the Annual Report. It appeared that there was a lot of installed automation in or around post office centres but was non-operational, as there was still major reliance on manual labour for the delivery of mail.

Mr Mackenzie asked what was the turnaround strategy to deal with labour disputes. It was disappointing that there was no clear strategy and direction set out for the entity as it moved forward.  The Individual Unit within SAPO was usually reliable, had a good reputation for delivery and cost-effectiveness, and he asked whether the SAPO had consulted various entities in the management and executives overall entities, to find out what they could do as separate cost and profit centres to actually improve the businesses.

The reports by the Public Protector and the Special Investigating Unit (SIU) revealed endemic corruption within the entity, but this had been a problem for years, as indicated earlier; the Chief Financial Officer (CFO) had been put on a special leave. Mr Mackenzie asked what had been done to ensure that the investigations were completed and action taken, and what measures were now put in place to prevent endemic corruption within the Post Office. A huge amount of money was lost to corruption. and this added severe pressure to the stability of the entity.

Mr Mackenzie pointed out that the "elephant in the room" was the SAPO's public portfolio. He wondered whether there was any plan to sell the unutilised buildings so as to raise capital and recapitalise the Post Office, and put money into systems and people to raise the viability. He asked what the occupancy rate was in the SAPO buildings.

Mr Mackenzie also agreed that labour relations remained a key challenge for the entity and asked whether there was a plan to consider automated systems to reduce the dependency on manual labour. He asked what strategy was in place to diversify the revenue streams? 

Ms N Ndongeni (ANC) welcomed the presentation and asked whether there were plans for a successful delivery of key projects like the Digital Terrestrial Television (DTT) set-top boxes. She asked the turnaround time for repairing the operational materials, like copier and fax machines,  especially in offices located in rural areas. She wondered how many postal retailers will be integrated to offer all services? She noted that slide 25 talked about oversight feedback, but clearly there was no feedback that was provided in the presentation.

Ms J Kilian (ANC) indicated that for the past five years there had been intensive discussions around the business model of SAPO and the possibility to turnaround, adjust and reinvent SAPO as it was impossible for it to be profitable sector while it was so heavily relied on mail volumes. She wanted to know what the current interventions then were into the business model and what the success stories were of other post offices globally? The Universal Service Obligation (USO) did not come without cost and there was also a problem in the licence agreement with the Independent Communications Authority of South Africa (ICASA) as it was only SAPO that picked up "the additional ticket" as the increase in staff costs, turnover impact of the labour unrest and the opening of more Post Offices would all have an impact on the balance sheet.

Ms Kilian enquired whether SAPO was investigating other possibilities and models to provide the services in remote rural areas with only small populations, and how to balance this where there was a USO. She asked how SAPO could leverage the network? It was heartening to hear that SAPO had managed to engage with labour unions to resolve the labour disputes and the problem seemed to emanate from the people who did not see the bigger picture, as striking workers would eventually have to be dismissed. She asked if there had been engagement with unions to bring awareness about business model of SAPO? She also reiterated that there needed to be consequences for the people who had compromised the organisation and asked what could be done to stop the trend of people not exercising extreme caution and integrity.
 

Ms M Shinn (DA) asked about the timing, saying that SAPO was expected to generate income from the Digital Terrestrial Television (DTT) set-top boxes (STBs). She thought the presentation by SAPO was "mundane", with essentially the same suggestions but no mention of a strategy to fundamentally transform the organisation. SAPO was in a stormy situation, the culmination of the years of incompetent and flat-footed management, with lack of imagination as to the business model of SAPO. The Parliamentary Committee highlighted, three years ago,  that the labour size of the Post Office was unaffordable and there is nothing that had been done to resolve this issue. This would surely result in the labour costs escalating and the universal service fees coming down. She wondered if the National Treasury had recognised SAPO's need for money to pay for USO; it was unrealistic for SAPO to service post boxes without some kind of subsidy.

Ms D Tsotetsi (ANC) welcomed the presentation by SAPO and also asked about the turnaround strategy and the way forward, since the organisation was still in a process of recovery. She wondered why there was not sufficient compliance to minimise and eliminate unacceptable risks in the organisation, identified by the AG as a key challenge. She also wanted to know the progress in reprimanding those who were found guilty of maladministration.  

The Chairperson asked to hear what the Department of Telecommunications and Postal Services (DTPS) had done to assist SAPO with its current challenges, what the responsibility of that Department was, and how it related to its own entities. The Annual Report was tabled late, while the organisation was still battling with relatively fresh challenges. The previous Board clearly failed to achieve its mandate and responsibilities, and she agreed that their priority seemed to be attending meetings rather than executing work. It was also clear that the sub-committees - for risk, audit and remuneration - were all non-functional, as there were risks that were not mitigated. There must have been a real crisis if the Board sat in 21 meetings in one financial year. Similar trends could be seen in other state entities, such as State Information Technology Service Agency (SITA), where Boards were regularly meeting instead of doing oversight.

She suggested that the Committee must recommend to the Minister that all entities reduce the number of Board meetings, in order to add to the financial stability of the organisation. The Committee welcomed the news that the CFO was put on special leave, although it would respect the internal processes. There was a need to speed up the investigation; those suspended or put on special leave were still earning although not working.

She noted her concern that the targets on the Strategic Plan (71) and the Annual Report (65) did not match, and it was unacceptable to have such discrepancy.

She noted that National Treasury was giving out money for the corporatisation of Postbank, so it could run like a commercial entity that competed with the established retail lenders for low-income consumers. She wondered if SAPO was hoping to get a balance from Postbank. She also wanted to now what was to be done with the unused buildings, and how these buildings could be used within the turnaround strategy to ease the current financial crisis?

The Chairperson highlighted that it was important for the Committee to get enough information on what could be done to rejuvenate the SAPO, prior to the tabling of the budget. She had been asked several times by the media whether it was now an appropriate time to privatise SAPO. She had always maintained that the organisation could get to its best and the issue was how to create a credible institution within the sector. She asked if there was a strategy in place to tighten the IT system so as to prevent cyber-crime? She wondered whether SAPO had done any comparative analysis and study on how other Post Offices were surviving in the global world. She too commented that the turnaround strategy of SAPO had been the same since 2010, which was of even greater concern considering the  major decline in mail volumes and progress in ICT.

 

The Chairperson maintained that the “no work no pay” rule must be stringently applied to the striking workers, as the cost of their salaries was extremely high. It was commendable that seven arrests had been made and six convicted with other arrests are imminent, and there should indeed be consequences for wrongdoing. The issue of recognition for some unions needed to be taken into consideration, as there had been no audit on union membership, which was creating confusion.

Dr Lushaba appreciated the compliment about the stability in the SAPO as this was the mandate that he was given by the Minister - essentially to deal with the labour unrests. It was indeed true that SAPS was dealing with ten years of problems, as pointed out by some Members. It did need to deal promptly with the dynamics within and between the unions, as these were currently volatile and unstable. The fact that the previous Board met 21 times for the Board meetings clearly showed that the situation at SAPO was spiralling out of control, although he noted that he did not have a mandate to scrutinise the performance of the previous Board members. The investigations of maladministration by the SIU focused not only on the previous Board, but on events since 2010. This was a time-consuming process but the SIU promised to speed up the investigations without committing to a specific due date.

Dr Lushaba reiterated that the whole issue of effective oversight of the organisation was extremely important for the provision of good leadership. He spent a lot of time, as a trainer, on important corporate governance issues, with the Institute of Directors. The issue of the abandoned Post Office buildings was still a major challenge to the organisation,n and this spoke to the issue of oversight and following things through to ensure that duties were executed accordingly. It was one thing to put a plan on paper and another to implement it. SAPO should appoint competent staff with good implementers that were able to follow things through. There were many ideas for the turnaround strategy, but many were not going to happen soon, as the current structure of the Post Office was very internally-focused.

He noted that a key point to bear in mind was that 98% of the revenue of SAPO was derived from business and government. The entity was still battling with moving data around instead of letters, and although there had been a small experiment on data storage, it did not grow because of lack of capital. There were plans to partner with other entities that had an interest in the business, and if this happened SAPO would put printing and faxing machines in a particular province, then, when the business bill was printed, would send the data to the location where that post was going, to expedite printing. This would open up a huge amount of capacity for handling parcels and goods. He agreed that digitisation was taking work away from physical letters, but it was also creating a huge industry for online shopping. It was now possible to create a link that allowed entrepreneurs from remote rural areas to trade their goods throughout the world. The SAPO should be facilitating this, because of the opportunities for handling those goods.

Dr Lushaba stated that the observations from post offices around the world showed that it was not unheard of for post offices also, in areas like shopping centres, to deal with handling of televisions and fridges and other high value goods. The SAPO should exploit this opportunity. The margins were good when handling such high value goods, and this was a business unlikely to be affected by digitisation. It would enable SAPO to diversify its revenue stream without incurring additional costs or utilise new property. The one thing that made retail centres competitive, compared to smaller retailers, were distribution centres where there were trucks carrying the right stock.

There was still enough potential, therefore, in the market for SAPO to be able to grow. The first step was to make sure that it was working far more efficiently, in terms of outflows and inflows of cash. Most of the Post Offices studied had been very successful as they had a good product mix between financial services, logistics, and e-business and mails. However, the US Post still had as many problems as SAPO, as it had too many casual workers, too much property and decline of mail volumes, although it was doing better in terms of labour relations disruption. The Italian Post Office revenue was derived from 82% financial services and 15% mail, compared to SAPO, which was 65% mail and 13% financial services. There was a need to grow logistics, e-business and financial services as part of the turnaround strategy.

Dr Lushaba said that all the properties belonging to SAPO had been audited. There were 446 actual properties. SAPO had managed to identify those that were vacant, debilitated and currently in use. The organisation was looking at auctioning some of the properties, with the Property Portfolio, to generate funding to close some funding gaps, but he could not expand on that at the moment. There  was an issue with automation, as there were machines that had been installed but were not being used, which were also supposed to be maintained by the equipment manufacturer under maintenance contracts, although the employees had not been paid. SAPO was currently renegotiating the bulk of the contracts, as there had been unfairness in the operation of the suppliers and employees.

The majority of the lowest-performing Post Offices branches in South Africa were located in the affluent areas, and SAPO was losing more money in these areas by having to pay higher rent and occupying very expensive floor space. He agreed that the USOs were very important and the Post Office, through the Regulator, is focused on compliance more than sustainability. A mind shift was needed. SAPO needed to empower other people and this could be done by offering postal services circularly, through small retailers.

He confirmed that the former CEO had been suspended after an investigation was conducted and it was a difficult situation as the organisation was forced to use an external Chairperson to take on that work. The investigation was due to be completed on 25 April 2015, but this depended on the number of witnesses to be called. There was a lot of investment required to protect the IT process, and the organisation had called upon Telkom for assistance in this regard, as there was already collaboration with the entity to create broadband capacity in the Postal Services, in order to increase the service offering.

Dr Lushaba said,in response to comments around striking workers, that SAPO did implement a “no work no pay” strategy during a labour strike. There were instances where some employees had signed the register then gone back home after receiving threatening messages, but SAPO was forced not to pay them despite the circumstances, since no work was actually being done. There were ongong discussions around ways to deal with labour strikes as there was usually a huge accumulation of cash outflows with no cash inflow. The organisation was currently unable to pay for the Acting allowances. People were keeping the Post Office running by taking on the work of two or three positions at the same time - for instance, Mr Mlungisi Mathonsi was Chief Operating Officer (COO) but also acting as a Group Chief Executive Officer.

Mr Andrew Nongogo, General Manager, SAPO, reported that SAPO was training staff from both rural and urban areas for the installation of DTT set-top boxes and was ready and awaiting the rollout of this process. The faxing and copying was one the profitable lines in the retail brunches, and SAPO wanted to continue with that, but problems still remained around the non-payment of suppliers who maintained these coping and faxing machines. The SAPO had been engaging with ICASA around the ways to minimise the stringency of those requirements of the license agreement, as Dr Lushaba pointed out that the focus seemed to be more on compliance than the viability and sustainability of the business. It was hoping that government would intervene on this challenge.

Mr Nongogo added that the SAPO was now focused on multi-channel strategy, specifically using retailers as opposed to rolling out a physical Post Office. The entity agreed with ICASA that where possible, mobile units will be considered as postal-points of presence. It had produced five already this year and this was more viable than a physical office, in provinces like Eastern Cape and Northern Cape. The focus of the organisation now was to explain to the labour unions the business model of SAPO, and especially how to ensure that the labour relations environment was conducive to the survival of the Post Office. It was introducing training on financial literacy in the labour unions so as to help members understand the financial statements of the organisation.

Adding to the earlier comment on readiness for STBs, Mr Nongogo said that SAPO was still waiting for Universal Service and Access Agency of South Africa (USAASA) to get going with the DTT set-top boxes so as to be able to start generating income. It was looking to benefit to around R992 million from this business model. The Committee would be provided with detailed information regarding all the properties belonging to SAPO.

Mr Nongogo said the discrepancy between the targets in the Strategic Plan and Annual Report would be rectified so they could be read together. There were attempts to get an independent audit of the unions and their membership by KPMG, which was last done in 2012, but there were a number of unions coming on board since then.

Ms Reneilwe Langa, Chief Director: Postal Oversight, DTPS, thanked the Committee for the opportunity to share information on interventions. The Department was committed to ensuring that SAPO was  able to recover from the crisis, as this was an important entity for the majority of South Africans. The Minister had addressed the previous Board on the challenges, and it was clear even then that some were deep-seated. Dr Lushaba was appointed after the Minister had intervened,  and there was an engagement with the National Treasury for the approval of the overdraft so as to support the stability of the entity. She added that USO was a key issue and the DTPS had formed a sub-committee informing SAPO on how it would be assisted by the Treasury. It had also engaged with ICASA to see if there was a way to relax the regulatory obligations.

The Chairperson interjected to indicate that the responses provided were not answering the question she posed. She wanted a focus on what precise steps were taken by the Department for the intervention, not a question on the role of a state entity.

Mr Michael Ntshingila, Chief Director: Internal Audit and Risk Management, DOC, mentioned that the purpose of SOE oversight was to help the government to manage interests in the SOE entities, how they were executing their mandates, and how this could be done in an efficient way. This was achieved through the monitoring of the Board to ensure that they were performing according to the their mandate. The oversight by the Board was supported by various legislation, including the Public Finance Management Act (PFMA), and this piece of legislation compelled Board members to act in the best interests of the entity, and exercise proper and due diligence and care. There were regular meetings and quarterly Performance Reports and a shareholder compact,which was the key agreement with the Board in terms of performance targets.

Ms Shinn inquired about the cost of the IT refreshment programme that was to be done by Telkom and wondered if there was any particular reason why SAPO chose Telkom, and if there was a possibility of making this an open tender process. 

Dr Lushaba responded that there was no signed agreement with Telkom as yet, but there was a strategic alliance, so it was not a procurement process. The SAPO had gone out on tender in the early 2014s and signed a Master Service agreement with Telkom out of that particular process, and the strategic alliance would be part of that agreement.

Mr Mackenzie questioned how it was possible that the Postbank IT upgrade of approximately 64 000 accounts was overdrawn to the value of R5 million, and +R600, 000 had been recovered and application control measures were put into place. The turnaround plan for the SAPO was scheduled to be heard  on 15 March 2015. There would not be sufficient time to deal with this and he suggested that at the Committee needed to engage to see if there was any chance of accommodating the stipulated time.

Mr Shaheen Adam, Acting Managing Director, Postbank, responded that the reason for the overdraft was that in November 2014, the Postbank had changed its whole system in line with implementation of a new and upgraded IT system.

Ms Kilian pointed out that corruption and fraud in the organisation was increasing in every financial year, as a total loss of R500 million was reported. She asked if any interventions were taken to resolve endemic corruption within the organisation.

Mr Adam responded that a large proportion of fraud and corruption within the SAPO was linked to mail violations and fraud was not reported in the format of "one incident affecting 30 accounts" but as 30 separate incidents. In one case, R2.5 million was stolen by the draft manager (since arrested) who accessed customer accounts to steal money.

Ms Tsotesi questioned if there was a way to monitor the performance and effectiveness of the training offered on the DTT set-top boxes.

Mr Nongogo responded that the effectiveness of the training for the DTT set-top boxes would become clear once the project was delivered by USAASA.  

The Chairperson appreciated that there was now more honesty and openness in the Board in terms of the key challenges in the organisation, which would in turn assist Members to come up with plans in terms of legislation, suggestions and the turnaround strategy. It was also encouraging to see the proposed change to the business model of SAPO to respond to technological changes. The motto of the SAPO "Delivery whatever it takes” needed to be internalised by all those involved in the organisation. It was important to highlight that the financial difficulty in the SAPO had not been linked into the Postbank, where there was stability.

State of the Nation Address (SONA) 2015: Analysis of implications for the sector

Mr Sandile Nene, Parliamentary Committee Researcher, indicated that the presentation would focus on the statements in the SONA regarding the role of ICT in enhancing economic development. The State reform focused on the boosting of State Owned Entities (SOEs) in the ICT infrastructure. Telkom was mandated to take the lead in the roll-out of broadband, with assistance from other SOEs.

The SONA 2015 flows from the National Growth Path (NGP) which clearly articulates that the national five-year economic plan for the country was built on a knowledge economy, an economy that was underpinned by access to affordable high speed broadband. It was projected that in 2015 about 250  000 thousand jobs would be created from the infrastructure internet projects, and the Medium Term Strategic Framework (MTEF) highlighted government’s commitment to implement the National Development Plan (NDP) and the 14 outcomes of government.

The delivery of broadband connectivity in schools was basically to ensure that learners utilised ICTs to enhance learning and teaching and to encourage connectivity and competencies on digital content. There were more than 195 local municipalities that did not have access to broadband, defined as under-serviced and still utilising 2G. It was also highlighted that Sentech was committed to connecting to underserve rural areas in terms of community media and public broadcaster ,as this was where there was still a huge backlog. The SITA would be focused on e-government. The infrastructure was delinking operations to ensure that Section 16 of the Constitution could be fulfilled in terms of access to information.

The SONA must not be looked into isolation as the DTPS was currently developing the implementation plan for SA Connect and the objective was to provide ubiquitous and affordable broadband for all the citizens by focusing on both supply side and demand side interventions.

Mr Nene stated that the key challenges that faced the current government were to prioritise on accessibility and reliability of the modern electronic communication, to enhance economic development. The government also emphasised the need to include universal access and service obligations, broadband connectivity to communities, schools, public institutions and under-serviced areas. There was a need to expand the reach of services, especially network services like infrastructure. It was recently stated that one of the cheapest prepaid broadband services, in terms of the mobile, came from Cell C and Vodacom. The SONA 2015 highlighted that the country needs to deal decisively with the issue of escalating data costs as this had created barriers for the poor. This again went back to the issues of accessibility and affordability. The ICT sector was impacting on current business model of SAPO as more and more people were moving away from the traditional ways of communication.

The Long-Term Evolution (LTE) was driven by the fact that the government must adhere to the International Telecommunication Union (ITU) deadline, in terms of the digital migration. Apart from picture quality and the access to a number of TV channels, it will also create job opportunities, and this needs a spectrum that will be useful for broadband. The SONA 2014 highlighted that by 2020 there should be 100% broadband rollout in the country. The Department was mandated to manage the relationship between the entities. It was noted that the entities were competing in both the infrastructure and services while in other countries there more competition on services. The President stated that with infrastructure came the issue of job creation, which was included in Chapter 4 of the NDP. The local municipalities needed to be integrated into the broadband connectivity and the key challenge to this was still on the infrastructure.

Discussion

Ms Kilian indicated that the presentation was interesting and this was an important guide for the Committee to further engage with the SONA 2015. There was a need for the Committee to inquire about the institutions that offered ICT courses, like technikons, as there was still not enough information about different degrees and diplomas offered in these institutions. She expressed concern that there seemed to be role confusion between the service providers and this would make it difficult to achieve the overarching goals. Lack of integrated and coordinated approach within the service providers was still a major challenge in the rollout of broadband connectivity and it was important to ask whether the Department had the capacity to roll out broadband and become proactive rather than reactive.

Ms Shinn indicated that there was a need for more information regarding Telkom becoming the leader in the rollout of broadband. She requested that the Minster come to the Committee to provide further details.

The Chairperson said there was a need for a proper engagement with the Department and its entities regarding the issues raised by the Members. It was now high time that that the country dealt with the issue of policy delays and expedited the implementation of the policies. The Committee had already engaged with SAPO to deal with how the sector could benefit from the opportunities presented by the ICT sector. There was a need to explore the mechanisms in place in order to acquire the funding for broadband connectivity in rural areas, as this was where it is unlikely to be profitable and attractive to service providers. It was problematic that there were people, within both the Department and the entities, who did not follow up on previous decisions of the Committee, instead choosing to flood the Committee with more information.

She said that the issue of the ICT policy review needed to be looked at. It was currently under way and would be brought to Parliament, but the broader vision should be about linking all the ICT policies to the ability to communicate effectively. The Committee needed to delve further into the current position of the Department in the rollout of broadband. She agreed that the Minister still needed to come to the Committee to explain further what was meant by Telkom playing a leading role in the rollout of broadband and what this would mean for USAASA.
 

She asked Members to make suggestions on any other issues to be dealt with in the Committee programme.

Ms Tsotetsi expressed concern that this Committee was the one that was always compromised when there is a clash and the Committee must also be seen as important as other Committees as was falling behind in the programme.

The Chairperson appreciated the suggestion and promised that the matter will be looked into.

2015 First Term Committee Programme: Consideration and adoption
The Chairperson proposed that on 10 March 2015 the Committee must have a Joint Sitting with the Portfolio Committee on Communication. The Committee had identified three provinces (Northern Cape, Free State and North West) for oversight visits, but it was unnecessary to do oversight in all three. The Committee had written to all the entities in the particular provinces to give details on the kind of projects they were doing, the costs, beneficiaries and the impact of the programmes in their provinces, by 27 February, and a detailed report would be circulated once that information was received.
 

Ms Shinn suggested that the Committee should also arrange a Joint Sitting with the Portfolio Committee on Trade and Industry. She noted that the ICT policy review had nothing to do with the Portfolio Committee on Communications, so on 3 March the Committee should rather deal with the ICT policy review so as to have a very substantial programme throughout the year.

The Chairperson indicated that the ICT policy review indeed carried no policy mandate or any mandate for the Portfolio Committee on Communications, and promised to ask for more information on the matter from the Mr Cedric Frolic, House Chairperson.

She added that the Committee still needed a discussion around Broadband Infraco, where there were reported difficulties, and it was important not to reach the budget without consulting the entity.

The 2015 First Term Programme was adopted with amendments.

The meeting was adjourned.