South African Post Office (SAPO) 2014/15 annual report, with Minister and Auditor-General

Meeting report

Auditor-General of South Africa (AGSA) briefing on SAPO 2014/15 audit
Mr Musa Hlongwane, head of AGSA delegation, said the presentation would cover whether the financial statements were fair and reliable, whether performance reports were reliable and credible and whether key legislation was complied with. It also spoke to internal controls, key focus areas and AGSA’s recommendations.

Mr Janse van Rensberg, AGSA Executive, said the results for the financial statements showed regression. Proper discipline and policies were required to ensure accurate management. The performance report was an area of concern with usefulness and reliability of figures only 50%. Compliance with key legislation was an area of concern as it had regressed. He spoke about irregular and fruitless and wasteful expenditure. Key focus areas to improve outcomes were leadership, human resources (HR), cash flow, policies and procedures, the IT environment and infrastructure.

Discussion
Mr C Mackenzie (DA) said it was the second consecutive year that SAPO tabled their Annual Report late. Was there any indication they would hand in the 2015/16 Annual Report on time this year? Was it part of AGSA’s functions to ensure if controls were put in place by SAPO?

Ms J Kilian (ANC) asked if there was adequate will and capacity to manage within SAPO.

Mr Van Rensberg replied the concern for the past two years was whether SAPO was a going concern. AGSA was not comfortable with the going concern assumption because no evidence had been presented. Government or Treasury had to confirm if SAPO would get equity or guarantees which was a matter for Treasury and government to decide. That process led to a delay in the past but he felt that it would be resolved in time before the end of the financial year this year.

On monitoring, he said AGSA looked at assurance provision management and had regular meetings with SAPO.

On regression and capacity, he said SAPO needed cash. If they got it he was confident SAPO could be turned around. There was still a concern about posts in middle management being vacant.

South African Post Office (SAPO) on its 2014/15 annual report
Ms Bulelwa Soci, Deputy Chairperson, said Mr Mark Barnes, CEO, had joined SAPO in January 2016 and SAPO was dealing with issues raised by the Special Investigating Unit and were awaiting a report by the Public Protector. The CEO has had number of meetings with banks and Treasury to seek funding for the capitalisation of SAPO.

Ms Nicola Dewar, SAPO Acting Group Chief Financial Officer, said the annual results reflected the four month strike and the consequent loss of volume and revenue. Revenue was R5.3b representing a decrease of R529m in mail revenue. There was an operating loss of R900m and total losses were R1.5b. This trend was continuing into the current financial year with unaudited losses in the year to date of R1b. SAPO had no cash and was operating on overdraft. There was R391m cash but that was ring-fenced as it was for Postbank. The cash flow problems arose from continuing operating losses. An investment memorandum had been presented to the Ministers of Telecommunications and Finance.

SAPO had done poorly on the Annual Performance Indicators, achieving only 14% of its targets and 0% of its financial objectives. She spoke to the action plan to redress audit findings. She said SAPO was valuing its property portfolio, was providing for site restorations, was addressing adherence to retirement benefit obligations and was working on reducing irregular and fruitless and wasteful expenditure. Deferred tax and income tax would be adhered to fully in 2016 and SAPO was working on adherence to heritage assets management which could not be concluded quickly.
 
Mr Mark Barnes, SAPO Chief Executive Officer, said that the Post Office was not dysfunctional and had the capacity to get back to the revenue generated about three years ago. There were also have opportunities for growth with post offices being centres of society branching out into services like courier, insurance and banking.

SAPO had to pay creditors because it lead to operational paralysis and loss of clients. The Post Office was still a low cost service and had the biggest client base in SA and the biggest infrastructure base in SA. He had engaged with the unions and had found no militancy. The executive had developed a plan that would make SAPO profitable by 2018. He said SAPO would have a similar disastrous 2015/16 financial year. They were seeking bridging capital from the banks against unused government guarantees. Treasury was supportive of the plans. SAPO felt that the Post Office was a national necessity and only needed a cash injection to switch the business on. Financial services was a big part of SAPO’s forward thinking which would require the full licensing of Postbank.

SAPO would work with the Public Protector to root out fraud in irregular expenditure and fruitless and wasteful expenditure. He said the capital SAPO needed to raise was based on the R1b owed to creditors, contractual agreements with labour who had not been paid their promised increases. He was hoping to negotiate an agreement with unions to settle on past issues which also took into account the future. The strike’s impact on revenue had been a 30% loss and this damage had never been fully recovered. He believed the payment of pensions and social grants belonged to the Post Office and not private companies.

He was concerned about the market value of SAPO’s properties and whether SAPO needed any property at all. All contracts would be looked at as none of those he had seen were favourable to the Post Office.

The Minister, Dr Siyabonga Cwele, joined the meeting at 10.30am.

Discussion
Ms D Tsotetsi (ANC) said the big question was about HR and the people being appointed, as it appeared everyone at SAPO was incompetent, leading to paralysis at the organisation because there was no oversight.

Mr Mackenzie said it was a shocking set of results with a R1.5b loss and creditors owed approximately R1b. One of the creditors was an artist, a Mr Paul Preller, who had done a stamp design for the Post Office and had not been paid the R6 000 due to him. A service provider who had assisted SAPO workers get a matric certificate, was owed R100 000 and not been paid for 18 months.

He said he had laid criminal charges for fraud and contravention of the Companies Act against the previous directors of SAPO the previous year. He said the Post Office was looking for a bailout which would have an impact on the fiscus and economy. He was looking for a plan without resorting to government funding. What was the size, the number of people involved regarding the vacancies in middle management that were going to be filled and what were the costs involved. If the Postbank was stripped out of SAPO, would SAPO still be a going concern?

Ms N Ndongeni (ANC) asked if SAPO had contracts with government. How long running were the contracts with government departments and were they paying? What was the nature of the contract between SAPO and the Department of Communications. Did SAPO have an audit and risk committee and was it working - as SAPO had only achieved 3 out of 21 targets? She said the AG’s report noted that some property items had not been recorded and some were not on the asset register. What progress was there in implementing the SIU recommendations.

Ms Kilian asked if the Postbank money was ring fenced. She said the universal service obligations of SAPO were unfunded mandates and unrealistic. How would SAPO move from here regarding universal service obligations? Would they be engaging further with ICASA to set realistic targets? Was SAPO looking at sharing government facilities to curtail costs? On organisational structure and consequence management, she asked how the necessary management and performance systems would be introduced. SAPO needed to restructure its primary business as it was outdated.

The Chairperson said there was a lack of trust in the accuracy of information that was given. Basic operations such as policies and standard operating procedures should be in place. The Committee was not comfortable with additional funding being given to SAPO because systems were not in place which would translate that funding into the output that was needed. She wanted to know if the money required from government would be used to fund operations , as this would not be an investment in increased revenue. At a prior meeting, the Committee had been concerned with figures being given to them as being unrealistic. When would executive management positions be filled?

Ms Soci said the matter with the previous CFO had been finalised and she would leave permanently.

Ms Anthea Seafield, Group Executive Human Capital Management, said the settlement with the previous CFO was R1.4m in total. There had been a settlement because of the financial state of SAPO and because continuous legal costs could not be contained.

The Chairperson said money had been wasted because the CFO enquiry had been held for a year.

Mr Barnes said SAPO had taken legal advice which said that it would not win the case, hence the settlement.

The Chairperson said the issue was not just about the money, it was about the PFMA and accountability and consequences for wrongdoing.

Minister Cwele said the approach taken was that the case had to be finalised as soon as possible because the disciplinary hearing had been outsourced, financial constraints and legal costs were spiralling upwards. Both parties had caused the case to be dragged on. The CFO had been incompetent but her performance contract had not been signed.

The Chairperson said that three months would have been acceptable; nine months was not acceptable as there had to be consistency. She asked if the current executives had signed performance contracts.

Mr Barnes said he still had one month to sign the contract.

Ms Dewar said she had signed contracts as CFO of Postbank and as acting CFO.

Mr Mduduzi Zakwe, chairperson of the audit and risk subcommittee, said the environment that had been inherited had included a lot of risk that was not managed and controlled. It had engaged with internal and external control groups to tighten the control environment. A risk workshop with the executive, management and board would be held to rehash the risk register. It would hold workshops as and when the AG issued audit outcomes. There was a need to clean up the supplier database and each supplier would have to re-register on the database. The Post Office was looking into ‘evergreens’ and executives would be held accountable for contracts they entered into. The responsibility matrix was being changed. On investment, the subcommittee asked questions as to what were sunk costs and what were revenue generators. He said SAPO was moving away from the current network configuration to increase redundancy. The subcommittee disagreed with the AG on deferred tax assets but came to realise that the use of these tax assets would not be soon.

On the SIU report, Mr Zakwe said SAPO would become a core applicant with the SIU to nullify the Eco Point lease. SAPO cannot get out of the lease unless it was nullified by a court of law. It had asked the CEO to look at options for alternative accommodation.

The acquiring of cctv cameras was done illegally and Ms Seafield had been asked to initiate disciplinary hearings against the person involved and the immediate superior who was not willing to discipline the individual who acquired the cameras.

There had been a limited bidding process regarding Cape Circle. The subcommittee had requested that the underutilised CFC stamping machine at Cape Mail be sent to Durban. On property, Mr Zakwe said that there was no data ownership culture in SAPO. The subcommittee wanted to establish a culture of ownership of data and would sign off on its accuracy and completeness monthly. A data ownership policy was being drafted.

Mr Zakwe said as much as funding was being sought, issues of governance must continue.

On the question on stamp design, Mr Robert Nkuna, board member, said there was a stamp advisory committee who asked a number of people to provide stamp designs and then one was chosen. The winning design was then paid for. He added that the decision on the CFO settlement was not taken lightly.

Ms Nomahlubi Simamane, chairperson of the “Strategic Turnaround Plan” and Corporate Strategy detail, said the filling of the CFO and COO posts were critical and had to be done immediately.

Mr Elvis Rabohale, CFG chair, said that CFG since its inception was a loss making company. SAPO had always made good on the losses but in 2014 SAPO decided that it would not automatically make good any losses. CFG had gone from a R400m turnover to R160m. SAPO had taken a decision to divisionalise CFG. It had sent a recommendation to the authorities and it was awaiting a decision.

On middle management vacancies, Ms Seafield replied that the Post Office had started reorganising itself to address a silo mentality and its influence on operations. The project was at the final stages and they were costing the skills needed and senior management needed and were looking at developing specialist skills.

On branch management, Ms Seafield said that when the total cost to company policy was implemented there would always be discrepancies. It was looking at how these inequalities could be addressed and making the Post Office become a viable place to work. She said they were struggling to get the right person into posts because of the brand’s image.

On the policy environment, she said they had reviewed all policies concerning human capital. However unions had not been willing to engage to put in place new policies until some of the past historical issues had been addressed. SAPO had engaged the help of the CCMA to work through and address all issues and to review the policies and get these adopted. They were in the process of finalising a new agreement that would recognise all unions.

Delivery Agents were a means to address mail delivery in all outlying areas. They had fallen amongst creditors who had not been paid.

Ms Simamane spoke about re-instilling confidence about SAPO in the Committee. She said all the numbers were in the strategic turnaround plan and the question was just whether they were achievable. She said there was not money available that could yield the revenue generation which is one of the big issues.  The plan relied a lot on government business but there had been no success at all in that area. Hence the numbers have had to be reworked. Controls were being put in place and a dashboard was being created to track performance against plans.

Minister Cwele said the Department had assisted SAPO on the matter of government business: 21 departments were keen to give SAPO courier business but the stumbling block was the PFMA as it did not allow for these set asides. The PFMA would need to be amended regarding set asides.

On abandoned buildings, the Minister said that the Department was encouraging SAPO to go back to these buildings which were owned by SAPO and on which they were paying utilities.

On the CFG issue, the Minister said they should separate the CFG into two companies that were not performing and the two that were linked to CFG. He said that no risk should come to the two companies linked to CFG. He said he now heard that they were divisionalising it and hoped that the debt risk was not transferred to the whole group. They were still waiting on what was happening with regard to liquidation and wanted to know what was meant by divisionalising.

SAPO problems were not new, they were a result of events over ten years. SAPO had its own infrastructure but abandoned its buildings and went to shopping malls as a policy. The amount of investment into IT at Eco Point was huge and irregular and he was awaiting a formal response from SAPO board to the SIU report and was happy that they were working with the SIU. The key thing was to nullify illegal contracts like Eco Point and to recover assets because it was corruption by management. The sooner the board sent the report, the better. He said investment in SAPO was needed because business was not coming back. In poorer areas SAPO was the only form of financial service offered. It was critical that the CFO and COO posts were filled. He said the visits by Mr Barnes to SAPO branches helped workers feel that they were not abandoned and workers were the biggest investment of SAPO’s operations.
 
Mr Mackenzie asked if ICASA and the International Postal Union had imposed any fines or penalties for not providing services according to service delivery obligations. On the R79m overdraft, was that because commercial banks were reluctant to serve SAPO. On deferred tax, he asked if there is a time period where one could not apply for the deferred tax. He said there needed to be clarity on creditor preference. He told Mr Nkuna that the Preller stamp artwork was actually used on a stamp.

Mr Mark Barnes, SAPO CEO, said the Post Office was not in a position to selectively deal with creditors because it was against the law and if they found funding, they would deal with them equitably.

On the new corporate plan, he said the first draft was completed the previous night and was based on the funding plan taken to Treasury and the banks. He committed himself to starting the process to fill the CFO and COO posts immediately. He said Postbank was seen as an integral part of SAPO’s future strategy and a competitive advantage. The question of properties was under review. SAPO had engaged with ICASA.

Mr Zakwe said deferred taxes did not expire until the operational activity ceases to exist.

On the overdraft, Ms Dewar said the reduction in overdraft was because of keeping cash back to pay for staff deductions in the following month. It was just a timing issue and not a forced reduction by the banks.

The meeting was adjourned.