South African Post Office 1 Quarter 2016 performance: hearing

Standing Committee on Appropriations

12 October 2016
Chairperson: Mr N Gcwabaza (ANC) (Acting)
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Meeting Summary

The South African Post Office (SAPO) Chief Executive Officer reported that:
-  The analysis of revenue in this period showed stability despite prolonged delay in release of funds. This delay caused 79% overall revenue performance
-  Positive cash flows were not generated from operations and under-performance was observed in the sustainable delivery of social mandate due to late fund release and irregular expenditure.
-  Impressions received from the Universal Postal Congress in Turkey showed that Government interventions such as legislation and e-commerce empowerment were key growth indices for the uplifting of SAPO.
-  The progress made by SAPO included securing a first level banking licence for Postbank from the South African Reserve Bank, signing of a joint agreement between SAPO and trade unions to settle historical wages and the consolidation of existing loan facilities.
-  Management was committed to commercial re-structuring, restoring operation competence, organisation re- structuring and not using labour brokers so as to improve SAPO services.
-  Management was committed to implementing a strategic turnaround plan aimed at improving SAPO’s control environment and mitigating aspects impacting negatively on its mandate and the National Development Plan.

During the discussion the Committee noted that although targets were not met due to delay in funding and lack of client confidence, management’s commitment to a strategic turnaround plan, commercial re- structuring, restoring operation competence, prompt audit checks and organisational re-structuring would be factors that would assist SAPO’s growth.
Recommendations by the Committee to SAPO management included:
-  Benchmarking SAPO’s targets and filling of strategic vacancies
-  Development of SAPO as a critical player in the economic environment
-  Re-building infrastructure and improving SAPO’s business operations and services in the informal sector
-  Incorporating e-commerce into SAPO operations and using it to remain relevant in the economic environment
-  Timely reporting of financial and non-financial performance
-  Diversifying its services to the community and investing in areas that are profitable.

The Committee committed to:
-  Monitoring constraints faced by SAPO such as financial, legal and government commitment so as to ensure SAPO becomes a successful entity
-  Assisting in fostering a better relationship between the Chief Procurement Officer (CPO) and SAPO
-  Monitoring SAPO’s severance packages and matters that have a timeline.

Meeting report

Opening remarks
The Acting Chairperson, after opening with a moment of silent prayer,  said the role of the Committee was to monitor the financial and non-financial performance of SAPO and to ascertain that taxpayer funds were spent according to constitution provisions in terms of efficiency, effectiveness and value for money. He noted apologies from the Minister and Deputy Minister and the Director General who were attending a meeting in Pretoria.

Dr M Figg (DA) stated that the Committee needed to take a decision on frequent apologies received continually from key role players of the Department since 2014. He asked for clarity on the acting position of the Chief Finance Officer (CFO).

Ms E Louw (EFF) agreed about these apologies by key role players who might not want to account to the Committee. The Committee needed to make a decision on the matter. She also asked why Ms Dewar was referred to as acting CFO. She wanted to know if she was standing in and for how long.

Mr J Mahlangu (ANC) observed that certain decisions needed to be taken. The Committee needed to clarify whether the agenda allows only the Minister or Deputy Minister to respond to the Committee questions because if this delegation could not respond to them, then this hearing would be a waste of time.

Dr C Madlopha (ANC) agreed that the Minister and key role players should be present when they had a hearing with the Standing Committee on Appropriations. However, she appealed to Members to continue with the deliberations as the meeting date was a cabinet date and the SAPO delegates were present.

Ms S Shope-Sithole (ANC) stated that meetings should be arranged for dates that the Ministers could attend and if the Minister was not available then the Accounting Officer must attend as the minister could be replaced.

Other Committee members agreed on the need for clarity on the CFO issue.

Mr Omega Shelembe, Deputy Director General: State-Owned Enterprises Oversight, Department of Telecommunications and Postal Services (DTPS) apologised on behalf of those who were not in attendance

The Acting Chairperson stated that the Committee had always insisted on the attendance of the Director General as the accounting officer. He appreciated the ministers’ availability because political insights were gained through their presence. He advised that the Committee continued with the SAPO hearing.

SAPO financial and non-financial performance for First Quarter ended 30 June 2016: briefing
Mr Mark Barnes, SAPO CEO, noted that the Acting CFO Ms Nicola Dewar had been in position for six months and was representing the Office and not standing in. He briefed the Committee on SAPO financial and non-financial performance for April-June 2016 (see document for details):

Revenue Analysis
- The First Quarter at SAPO was a period of stability and 79% overall revenue performance was recorded despite prolonged financial challenges and lack of confidence in SAPO by clients and public
- Mail (5%), Mail parcel (31%). Retail (18%) and Logistics (62%) revenue had a year on year decline and anticipated revenue growth was not achieved due to funding delays that did not allow early investment in growth sectors, huge staff costs and 38% decline in budgeted transport costs
- Impressions from the Universal Postal Congress held in Turkey include opportunities for increased government investments and partnerships with SAPO such as: key legislation that empowers the post office to be a key role player in financial services and investments to deliver on e-commerce.

Performance Summary
- Operations did not yield positive cash flows because of late funding and overdraft servicing. However, in sourcing of transport costs led to a marginal improvement from prior year
- SAPO absorbed 700 employees from the liquidated courier arm into its mainstream to cut down expenses as the courier arm is a future revenue generator
- Under-performance in the first quarter as evidenced in sustainable delivery of its social mandate was due to deferred start which led to delay in IT expenditure. However, fair market value has been implemented in the procurement process. The CEO insisted on deferred expenditure by getting prior commitment before initiating contracts. This measure will ensure a reversal of losses during the third and fourth quarters of 2016.

Critical Next Steps
These involved:
- Commitment to commercial re-structuring by focusing on major clients through CEO personal visits to generate revenue
- Restoring operation competence as trust is important for revenue growth
- Organisation re-structuring that involves skills for jobs not titles
- Steps used to re-position SAPO: client breakfast meetings with CEO to ascertain progress on new business and not using labour brokers as this led to huge waste of funds.

Progress achieved during July 2016
- First level application for banking licence for Postbank approved by South African Reserve Bank.
- Joint agreement signed between SAPO and recognised trade unions to settle wages from 2014/2015 onwards and have better conditions of employment with payments to be effected during July-August 2016.
- Consolidated the existing loan facility of R1 billion by securing a three-year loan facility of R3.7 billion from major financial institutions.

SAPO Mandate
Based on SAPO mandates, the management:
- Commenced discussions with the regulator Independent Communications Authority of South Africa (ICASA) to protect SAPO against competition.
- Will embark on stopping revenue leakage by effectively monitoring and policing reserved mandate areas e.g. Postnet must pay licence fees as the rewards generated will be a middle class that will pay for services.

Role of SAPO in the National Development Plan
Prior challenges observed were due to bad management however the new SAPO is committed to play its role in the National Development Plan objectives by implementing Strategic Turnaround plans that:
- Protect people socially by borrowing vulnerable groups’ money at a correct price,
- Commitment to infrastructural co-development rather than selling to other stakeholders
- Getting Government to commit to using SAPO to disseminate information to the people.

Audit matters
Management’s commitment to a rigorous audit process involved quarterly reviews and maintenance of high performance standards and prompt sorting out of audit matters.

- Delay in getting funding, learning the business, not wanting to use consultants and irregular expenditure negatively impacted on the financial and non-financial performance of SAPO in the period ended June 2016.
- The team expects clients to trust SAPO and patronise the entity as a hardworking and considerate Board, new management and dedicated staff which are necessary ingredients to deliver, will restore SAPO’s performance levels.

Ms S Shope-Sithole (ANC) commended the Chairperson and the CEO on the performance during the period under review despite SAPO’s challenges. She was impressed by the CEO’s stance of not wanting to use consultants but advised the CEO to give timely reports on the financial and non-financial performance by convening a meeting himself so as to eliminate waste of funds. The Committee is committed to having four quarterly performance meetings.

Dr C Madlopha (ANC) welcomed the report, appreciated the work that SAPO had done and commended SAPO on its efforts to resolve the audit findings despite the qualified audit opinion as most entities battle with their audit outcomes. She asked whether the turnaround strategy was yielding any positive result and when SAPO hoped to be stabilised. She asked for clarity on the decline of R310 million against the budget deficit reported by the CEO; does it take into account profit made by SAPO and what are the steps taken so that it does not infringe on all SAPO’s spheres of business? Why did SAPO lose business from SASSA? Why did SAPO not meet its Quarter 1 targets and what impact does this have on its expenditure? What measures have been put in place to achieve these targets in the next quarter?

Mr Barnes replied that:
- The turnaround strategy would lead to stabilisation by 2018.
- The decline of R310 million against budget deficit is inclusive of SAPO profits.
- SAPO lost SASSA’s business due to some policies by SASSA management.
- Targets not achieved in first quarter were because funding was not yet received (no money in quarter one and two) and this led to lack of confidence, for instance, SAPO not being able to pay contractors. Progress achieved was due to staff resilience.
- Measures put in place by management include: the right environment provided for staff to work and the CEO is working on operation standards.

Ms E Louw (EFF) agreed with Ms Shope-Sithole that timely reports on financial performance were needed. She stated that her question about the CFO was not to undermine the CFO but clarity was sought because the position was a critical one. She supported Dr Madlopha about quarterly targets but asked how far management went to follow up on achieving these targets. Who are the people responsible for the loss of Base Case revenue and what are the disciplinary measures employed so that this does not happen again? She asked if audit issues have been sorted, whether audit reports to management existed and how regular these reports were.

Mr Barnes replied that:
- Management would follow-up on targets by introducing benchmarks for performance. Delay on benchmarks was due to their flawed nature which showed punishments but did not mention rewards.
- Poor service levels due to non-payment of suppliers led to the loss of Base Case revenue however partnerships, the Government guarantee and receipt of funds is been used to stop this trend.
- All audit issues are been looked into and the right atmosphere for internal audit to have frequent meetings with management to discuss their reports, has been created.

Dr Figg (DA) observed that the report covered all segments and commended the CEO on his turnaround strategy. He stated that improvements in the third and fourth quarter performance would show his sincerity. Questions were asked on the time frame for the staff head count, completion of the organogram and a report on irregular expenditure. He asked about the standards put in place to increase profits and whether it included punishment for lack of performance.

Mr Barnes replied that:
- The organogram backlog would be completed in November 2016 while irregular expenditure would be completed at a later date due to backlogs.
- Standards put in place to increase profits are highlighted in the strategic turnaround plan.
- Performance standards and punishments are being worked out.

Mr J Mahlangu (ANC) joined other committee members in commending management on its performance despite the competitive environment that SAPO was operating. He asked whether there were constraints legal or otherwise that did not allow SAPO to fulfill its role as outlined in the National Development Plan. He suggested that monthly internal audits should be carried out.

The CEO sought the intervention of the Committee for the fulfillment of SAPO’s National Development Plan role as SAPO needed to be empowered. He noted the regular monthly internal audits and the suggested audit interventions.

Ms N Ndongeni (ANC) asked questions about the number of strategic vacancies in SAPO and the timeframe needed for filling them, progress made in SAPO and future prospects for 2018, SAPO’s unmet targets and steps taken to meet these.

The CEO explained:
- The delay in filling strategic vacancies was deliberate as he needed to get operational standards in place. He however promised to work on it and fill these strategic positions as soon as possible.
- Progress made has been as outlined however measures in place would further ensure reversal of losses during the third and fourth quarters of 2016.
- Turnaround is expected in 2018 and a programme for SAPO re-invention is in place. Furthermore, quarterly revenue targets have been cut to daily targets as a state of emergency has been declared in SAPO and CEO is involved in driving business to SAPO.

Mr A McLoughlin (DA) commended the CEO on his performance. He asked about SAPO registering households for digital terrestrial television (DTT) and its significance for SAPO and what was causing the turnaround at SAPO. He asked for clarity on retail revenue and what led to its decline. He was concerned about future plans for making Postbank profitable and asked if the Financial Services Board will be involved in Postbank. He asked if SAPO received Government guarantees for financing its expenditure. He asked for more information on Tenders (RT5), obstacles being faced and what the Committee and Government could do to change the situation. He wanted to know if the labour disputes had been settled. Finally he asked how management intended to communicate its strategic turnaround plan (STP) to staff and how this will be implemented based on the drafted conditions of service.

Mr Barnes replied that:
- The drivers for turnaround included: being truthful to labour, a listening ear to staff, and incremental changes. Furthermore, management is in the process of motivating staff to change their negative attitudes to work. This is been achieved by letting staff see the possibility of future gains from working at SAPO.
- The acronym DTT stands for Digital Terrestrial Telecommunication which is a project that SAPO is using to generate revenue. The DTT project roll-out has been slow but it is not a long-term project and payment will be received in due course. However, the first payment installment has been received.
- Retail revenues are sourced from the retail arm such as courier - this has not been successful for the past ten years - however intervention would come in the form of partnerships with private organisations.
- New business at Postbank would fulfill a socio-economic role, fund businesses and provide capital to the unbanked at a reasonable cost and would not be for economic gain.
- SAPO was currently meeting with the Chief Procurement Officer (CPO) on tenders.

Ms D Senokoanyane (ANC) agreed with Ms Shope-Sithole that SAPO was facing serious challenges due to a more competitive environment and commended the SAPO CEO for proposals on the way forward. She expressed concern about the payback of the three year loan facility used in settling labour claims. She asked how the new SAPO intended to address the timeframe for delivery of mail to households and claims by SABC of unpaid television licences when clients have postal proof of payment. She asked how SAPO coped with rural areas that did not have ATMs.

Mr Barnes replied that:
- Two further capital injections were expected from National Treasury for capital equity. Although SAPO was not expected to approach banks for loans, the delay in the release of funds led to securing such loan facilities.
- Timeframes for mail delivery is been handled by improving SAPO operations and empty postboxes are strategies to restore clients. The courier business is been overhauled and SAPO is working on creating speed services.
- A better relationship is being worked out with SABC on television licences.
- It was accepted that losses would be made in the rural areas but the difference was that subsidies were paid to SAPO in 2010 and Government would be approached to resume payment of these subsidies.

Ms M Manana (ANC) observed that the report inspired confidence despite the negative trend at SAPO. She asked how information on turnaround would be passed on to the public, the timeframe for DTT registration and sorting the labour broker issue. She asked how long it would take for South African Reserve Bank to complete the approval of Postbank.

Mr Barnes replied that:
- The creditors were current, all labour issues had been settled and SAPO does not use labour brokers any more.
- SAPO is currently embarking on a re-invention programme to communicate the turnaround agenda to staff and clients. This programme will build trust and the confidence of our clients in SAPO.
- The approval timeframe for Postbank should be in the next nine months and it should be fully operational by June 2017 as compliance issues are being settled.

The Acting Chairperson asked for the number of post offices country wide and their operational status. He sought clarity on procurement and asked if SAPO had considered partnerships with Government property and transport agencies such as Transnet. He requested a written response on supply chain management issues.

The CEO replied that:
- SAPO runs 1 600 post offices and 700 agencies. SAPO does not have any strategy for closing post offices or selling SAPO assets. However, closures have occurred only when landlords have ejected SAPO from the property rented.
- He had not engaged with government property and transport agencies and he would work on procurement partnerships with the Chief Procurement Officer in National Treasury.
- He promised to send answers in writing concerning supply chain management issues.

Mr Omega Shelembe, Deputy Director General: State-Owned Enterprises Oversight, DTPS, explained the some of the oversight functions of the Department. The Department was involved in facilitating the disbursement of capital from National Treasury to SAPO. Further, it was involved in monitoring the ongoing activities of SAPO and it also facilitated the meeting with the Chief Procurement Officer.

The Committee resolved that:
- Management needed to bench mark SAPO’s targets and fill strategic vacancies promptly.
- SAPO needs to be developed as a critical player in the economic environment.
- Management needs to build its infrastructure and improve its business operations and services for the informal sector.
- Management should incorporate e-commerce into its operations and use it to remain relevant in the economic environment.
- Management needed to report financial and non-financial performance promptly.
- Management needs to diversify its services to the community and consider areas that are profitable.
- It would monitor constraints faced by SAPO such as financial, legal and Government commitment so as to ensure SAPO is successful
- It would assist in fostering a better relationship between the Chief Procurement Officer and SAPO
- It would monitor SAPO’s severance packages and matters that have a timeline especially those pertaining to expenditure.

The Acting Chairperson thanked SAPO for their impressive briefing and adequate responses.

The Committee adopted meeting minutes for the period 24 August to 15 September 2016.

The meeting was adjourned.

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