SITA & Broadband Infraco on 2015/16 Annual Report

Meeting report

State Information Technology Agency (SITA): Annual Report 2015/2016

Dr Setumo Mohapi, Chief Executive Officer: SITA, said a review of the Agency’s financials had revealed a number of problems. There was reference in the annual report to a revised budget, as the original budget which went into the annual performance plan (APP) had been a loss budget. SITA had reworked the budget and revised it. The revision had had no effect on the APP programme.

 

Labour costs had been understated by almost R200 million. These costs were unavoidable, and should have been known by management. If SITA had not done anything, it would have been in a negative budget and contravened laws. It had revised the income down by R 525 million.

There had been an increase in indirect labour. The previous budget had not considered vacancies or inflationary considerations. The rest of the changes were not material. The effect of the changes had been that the operating surplus had decreased. At this point, it was a viable budget, and SITA was confident it would meet its objectives.

SITA created programmes which laid the foundation for better insight into the operational environment in finance, supply chain management and certain technical operations, enabling management to implement certain improvements.  There were problems around the efficiency of supply chain management.

SITA had launched a campaign that provided an attractive and cost effective incentive for its customers to upgrade their bandwidth. As at the end of the financial year, 504 proposals had been sent to clients, of which 252 had been accepted. It had also assisted the Western Cape Government with their requirement to provide a high-speed broadband telecommunications network and provide connectivity for the transmission of data, voice and video. Eight banking sites had been connected, making it easier for the public to obtain new ID cards through the Department of Home Affairs’ modernisation project.

The Agency had adopted a new programme that would accelerate changes in the procurement process. The operating model suggested in the APP did not provide space for SITA to establish solutions. The focus on risk had moved away from just governance structures to the more challenging tasks of de-risking government operations as a whole

The performance review indicated there were 24 e-government services. Previous e-services had been doing transversal services based on certain specific requirements. In the third quarter, SITA had agreed that it would provide business intelligence to government. There was government to government, and government to business, data which could be transferred.

Dr Mohapi said changes had been made in the macro organisational structure to ensure high coordination between the service delivery functions, and better coordination, monitoring and evaluation of all the strategic programmes of the organisation. It was clear that the organisation’s accommodation was not ideal. It had made changes to how it procured laptops.

SITA had achieved 68% of its targets, and had not achieved seven of them. It should have done better with regard to governance and administration.

There were a number of factors that had influenced the procurement structure. These included people interests, or skill interests, and the process itself. End-to-end processes had previously not been there. The process was not documented, and practice was lacking. SITA’s bid specifications had been scrutinised more closely, with blind evaluations being done prior to approval to ensure specifications were clear.

Ms Rudzani Rasikhinya, Chief Financial Officer (CFO): SITA, said one of SITA’s targets had been to have a positive budget, but it had recorded a deficit. SITA’s revenue had amounted to R5.5 billion. With regards to actual service review, it had performed way below budget (R517.8 million), while agency revenue had over-performed by R384.1 million. There had been a saving in service delivery costs. One issue that had made the SITA situation worse had been impairments. These had been adjusted after due consideration of Integrated Financial Management System (IFMS) projects. R134 million had been impaired. SITA had added 498 people into the organisation, as it wanted to use internal staff to deliver services instead of contracting out. However, this had not happened, and SITA was looking at this issue very carefully.

As an organisation, SITA had not generated enough cash to cover its operations, and had tapped into its reserves. In 2013, it had had a cash flow of R228 million, but since then the free cash flow had been negative. This indicated that the bank balance was declining. The main issue going forward was that SITA needed to increase its revenues, particularly service revenue and not just agency revenue.

Mr Zukile Nomvete, Acting Chairperson of SITA, said that the Agency had received an unqualified audit on both financial statements and predetermined objectives. There were two areas which had been highlighted with regards to compliance. The first dealt with a historical problem, which was a reinstatement of previous annual reports relating to the disclosure of financial statements. The second dealt with fruitless and irregular expenditure amounting to R63.4 million and R1.3 million respectively.

Discussion

Ms M Shinn (DA) referred to the opening remarks about labour costs, and asked if there had been any intent to hide those costs. Was any action taken against people who had been responsible for this? Was the loss of government business and the prospect of a change in legislation not regarded as a risk? With regard to the legal action against SITA, what money was in dispute and when would the matter be resolved?

Ms M Kilian (ANC) said that it was exciting to see that an entity with new leadership could make a turn around. If SITA succeeded, then the government could succeed too. She referred to the personnel expenditure and revised budget, and asked who had responsible for creating this negligent and unaligned budget. What had happened to this team, and had any action been taken? What was SITA’s turn around time in respect of discipline? She sought clarity on the cyber security tender, asking where SITA fitted into cyber security, and which department led SITA.

Mr E Siwela (ANC) asked whether the executive summary was working as it should. Where there were issues, there seemed to be an obsession that automation would solve them, but what was the effect on employment? Productivity and profits increased, but what about social issues? There needed to be a balancing act.

Ms D Tsotetsi (ANC) asked what the percentage of the backlog was, and whether there had been progress in reducing it. Had there been any cooperation from departments in debt collection? She asked for an update of cases so that the Committee could assess progress.

Ms N Ndongeni (ANC) referred to SITA’s participation in the training of 210 youths, and asked how many SITA had retained. The employment target for female and disabled employees had not been achieved, so what would be done to rectify this? Why was there only 45% in security of information technology controls?

Mr C Mackenzie (DA) asked what the current makeup of the audit and risk committee was, and if it was sufficiently capacitated. With regards to finance income, was that income on debtors or investments? What did the foreign exchange loss relate to, and what steps had been taken to mitigate this?.

Ms V Ketabahle (EFF) asked what the plan was for departments which did not pay.

The Chairperson said that it was refreshing that most of the Committee’s recommendations had been taken into account. With regard to SITA’s financial performance, it had almost under-spent in all its capital expenditure budgets. This was a concern. What were the mitigating factors? She asked for clarity on the staff targets and verification comments, saying she was not comfortable with the explanation. The AG had consistently raised procurement issues with SITA. What was it doing to fix this?

Dr Mohapi said that SITA had not found any reason to believe that there was a benefit to be derived from an understatement of costs. There were some management issues. The calculations which had been used had been the same, but this year some anomalies had been identified. Two interventions had been made. In the first quarter, SITA had halted procurement, and subsequently it had extended the moratorium on procurement.

Referring to the human resources (HR) environment, SITA had instigated a forensic investigation into the whole HR department. Some people had left and some had been subject to disciplinary measures.  SITA had found that the management systems were weaker than they should have been. The CEO had met with the chief information officers (CIOs) and had had robust discussions. One took solace from what was in the White Paper with regard to SITA. There was a future for the organisation. There were things which could be done better to maximising its value to the public. It supported the White Paper fully.

With the legal cases, most of disputes had to do with supply chain issues, and involved procurement rules which had not been adhered to. In the last financial year, only one had been lost, where there had been allegations around an evaluation. The rest dealt with other matters outside procurement. SITA had generally been winning cases. There was an important case at the Supreme Court of Appeals, which dealt with the balance between the Promotion of Administrative Justice Act (PAJA) and legal obligations. This case needed to be taken to the board, as it affected the success rate on other cases.

The finance function was developing faster than any other function in SITA. There had been a change with the head of management accounting. From a professional point of view, things had not been done right.

There were problems with regard to disciplinary hearings. Some employees had resigned during disciplinary hearings. Some matters had been referred for legal action. SITA had requested that matters be dealt with through formal sittings. Some disputes had gone to the Commission for Conciliation, Mediation and Arbitration (CCMA). SITA had established a new committee which had been given powers to prosecute where the process was slow.

The tenders which were supposed to implement cyber security had been cancelled. For now, SITA was doing this in the context of the systems it was managing. This represented a point of entry into government systems.

Bank connectivity was working and agreements had been established. SITA was putting the lessons learnt to use. Automation would have an impact to jobs. Employment and public sector obligations needed to be balanced. SITA needed to meet the public’s expectations for efficiency.

SITA’s role was not about administering tenders. It was a supply chain management function which affected efficiency and profitability in the private sector. SITA supplied government with functions. If it was late, services were late. SITA wanted to recreate that profile.

Dr Mohapi said that 99% of the original backlog had been cleared. There were issues of unclean and hidden data, but these were being sorted out. There was a problem with the delivery of services and not getting paid for them. There was a list of people who needed to pay SITA, and this was being attended to. Some bills from SITA had gone to the wrong department divisions.

He did not have the numbers of trained youths, but would provide them, as well as the figure for interns. SITA’s internship programme was undergoing an overhaul. The CEO and senior level management had taken over the programme to deal with disability issues and female workers. Consequence management was taking place. This programme had been a failure, but SITA would ensure it functioned better.

With regard to the exchange rate, there had been losses. The CFO was working on a programme with National Treasury. Plans were being made to deal with departments which did not pay. SITA had been working with the Department of Telecommunications and Postal Services (DTPS) and National Treasury to enforce payment.

SITA’s liquidity ratio involved cash given upfront, and the main risk was on the preservation of cash and prioritising its use in capital expenditure (CAPEX) programmes. This situation of cash management would continue in the next financial year. A key intervention was that every request for CAPEX finance needed a full cash flow business case.

SITA accepted that its bid specifications had not been good. There had been issues with the legal language. SITA had issued new standards on legal language and finances. It had put litigation to risk. It had said that for anything above the level of R100 million, the bid specification had to be checked with the executive. It was not the ideal situation, but once SITA had the capacity it would provide the correct checks.

With regard to mitigation, there was a statistic which showed that 80% of requests to renew contracts came a month after the contracts expired. Demand plans had been completed, linked to budget and published online. This allowed SITA to implement quality control on internal audits.

The audit committee had been supportive of the intervention of management. It had become evident that some issues in procurement involved human resources and industrial relations. There had been poor contract management.. The board was waiting for a new set of directors to be appointed. This was the first time that SITA could address important issues under the current management.

Ms Kilian said that the Committee sensed that there was a bad culture within SITA. The mandate of the entity required very well skilled people for it to operate. Did SITA try to upskill people? Did the performance management system provide proper details of positions? Was the integrated financial management system operational and if not, when would it be operational?

Ms Tsotesti asked for a list of the departments which owed SITA money. Did the youth training include the youths in rural areas? Apart from the Western Cape, did other provinces have broadband connectivity?

Ms Shinn said more income was coming in from service business than agency business. Was there a possibility of getting loans for capital expenditure? What were SITA’s future skills needs? She asked about the remuneration for an executive director who had served no months, but had received money.

Mr Mackenzie referred to trade receivables, and asked why there were so many late payers. What percentage of late payments had been from the services side, and from the agency side? SITA had written off R280 million in debt. With regards to the ethics line and the anti-corruption line, what kind of reception had this received among SITA’s employees? Had SITA offered any rewards?

Ms Ndongesi asked what SITA’s skills retention strategy was.

The Chairperson said there was issue of remedial action. There had been previous issues, and if remedial action was not in place, the problems would continue. Something needed to be done.

Dr Mohapi said that SITA had established a dashboard and was running with it.

The Chairperson said this was comforting. She asked what had happened to the pool of employees.

Dr Mohapi said it was clear that there was a need for skills which were not at SITA now. These included public policy thinking and strategic thinking -- people who could create value propositions -- public service thinking, and technical, product solution and consultation skills.

By the end of the third quarter, certain appointments would be made. SITA was creating strategic management and profiling. Finance people could go into product work, while business analysts could go into solutions. SITA’s training programme had changed, although it had a very small budget for training. SITA retained people not by paying them more, but by ensuring that the working environment was conducive and valuable to them.

The IFMS system was not in place. The project plan was long -- seven years – and the project scope was wide and complex. This would take some time. There were milestones to measure progress.

SITA would provide a list of all departments which had not paid.

Apart from the Western Cape, broadband was being done in Gauteng. The province had asked SITA to assist them with the expansion. The Eastern Cape and Mpumalanga were showing interest too. These proposals had been submitted and were moving forward.

Regarding the ethics line, employees had complained on human resource issues. Anti-corruption was a key element being looked at. On the SITA website, the ethics line had been made larger, with more information, for it to be more dynamic.

With regard to skills retention, the profile for absolute age and employment age was different than that in society. People stayed at SITA for a long time. The employment age was on the old side. The retention programme was aimed at young people. SITA was improving its training programme in this regard and was looking at bottlenecks within the system.

Broadband Infraco: Annual Performance Plan

Ms Puleng Kwele, CEO: Broadband Infraco (BBI), said that considering its overall performance at a glance, the company had grown its customer base. There had been a steady year on year growth in revenue, from R366m, on a sustainable trajectory. BBI was also realising the benefit of migrating new customers on to its own infrastructure, thereby reducing lease costs from third parties. The company was also optimising its co-location, metro-lease and maintenance.

Management had ensured compliance with transformative targets in procurement. People with disabilities and youth remained a problem from an employment viewpoint. The transition equipment had been supplied by international manufacturers. There had been no irregular expenditure and there was a new supply chain management (SCM) policy which had been running since 2014.

With regard to the entity’s external audit performance, there had been eight findings. Five had been made on compliance with performance information, which related to stretch targets determined in the second quarter of the year. Others had been on compliance with the memorandum of incorporation (MOI), on going concerns and on revenue. These had been resolved and the annual performance reflected the original submission on the stretch targets.

Regarding the status of the drivers of internal control, regular reporting had regressed. The environment, however, was stable. This was part of the extended annual report. The turnaround strategy had had some results, but BBI was not where it wanted to be. The National Occupation Safety Association (NOSA) application and ISO 18001 had been successful audits. The entity had received an unqualified audit report. Irregular expenditure was down.

Ms Kwele said that the BBI had worked to achieve what it had been set out in the APP. On shareholder compact achievements, it had not achieved its targeted actual revenue. There had been 420 km of fibre added to the network. BBI had connectivity with Botswana. 33 points of presence (PoPs) had been optimised. Training expenditure as percentage of payroll was 1.33%, and above the 1% target. This was a technical environment. The targets pertaining to Public Works Department original equipment (PWDOE), the stretch target of accrual revenue, and the Synchronous Transport Module (STM)-1 at STM-1 Equivalent had not been met. This was a concern.

Ms Meta Maponya, Chairperson of the Audit Committee, BBI, said that revenue had increased by 24% to R452 million. This was as a result of additional revenue from key customers, and was related to new contracts and the retention of existing customers. Costs of sales had decreased by 18% to R260 million as a result of lower fibre lease and maintenance costs due to favourable negotiations with suppliers, a continual drive to optimise costs, optimal designs and vigilant oversight on all financial outlays.  Operating costs had decreased by 6% to R292 million due to natural attrition of employees. Performance incentives had been R8 million. The operating loss had decreased from R245 million to R91 million.

With regard to depreciation and amortisation, there had been an increase in the asset base due to completed projects that had increased depreciation. The useful life review had resulted in a depreciation reduction in the previous year.  With regard to the financial position, assets stood at R141 million and equity liabilities at R110 million. Current liabilities were R575 million.

Pertaining to the cash flow, BBI had been reinvesting cash. The cash and cash equivalents had been R141 million, and the cash from operations had been R137 million. The infrastructure roll out performance was related to multiyear projects. 1117.8 km of fibre had been completed nationally. The target for average service availability per quarter had been 99.5%, and this year BBI had accomplished 99.79%. It wanted to improve on this by putting in technology and doing it optimally.

With regards to customers, BBI networks were evolving and customers were happy. On human resource management, BBI reviewed each year that which was needed to do. Correct skill capacity was a key area of focus. There were 151 personnel in total inclusive of interns. A number of risks were identified. Liquidity was the biggest problem for BBI.

Ms Kwele concluded that BBI continued to deliver on its mandate and drove high performance grounded on sound governance. Liquidity continued to be a challenge. BBI would continue to work with its shareholders to resolve this problem.

Discussion

Ms Shinn asked about shareholder loans, which amount to about R4 billion over two years. If BBI did not have this money, it may be a concern. Who were the people who were paying for the BBI services?

Ms Ndongeni asked what process the company had put in place to address the audit findings. Could the BBI elaborate about people with disabilities in the company, and what would be done about stretched targets not met?

Ms Tsotesti said it was a concern that the BBI had difficulty in raising funds. With regards to the issue of HR, why had personnel not signed? What were the issues faced when BBI appointed a person?

The Chairperson said there had been improvements with regard to BBI's audits findings. It had found its feet in terms of financial accounting and improved audit outcomes. The management team was working hard. There were still challenges around finances. When one had a loan not cleared in balance sheets, it remained difficult to borrow money. What had happened here? There had been cross cutting measures -- would these bring BBI out of its liability issues? The major focus going forward should be the financial stability of the company.

Ms Kilian asked if there was any reason why BBI’s auditor was not AGSA. Why had audit fees been reduced greatly? Could BBI expand more on the legal proceedings it was involved in? Who were the performance bonuses for? Were there criteria for which these were awarded? With regard to people management, there were fewer people and a reduction in personnel costs, and it was good to see that management was managing tightly. The business had diversified, and this was good. Why had there been several resignations in quarter three? Regarding future sustainability, did the company believe that it could expand further, as this would assist in income generation?

Ms Maponya referred to the balance sheet loans, and said there had been no addition from year to year. This had been the initial capital injection by shareholders. There has been no further capital injection. The repayment of loans was currently a growing concern, because they were subordinated. In previous discussions, BBI had requested whether the shareholder could make those loans be reflected as equity, rather than loans. This was affecting funding.

BBI was not going to be looking for funding for the sake of it, but would look for funding on a project finance basis. Going forward with regard to procurement plans, BBI was looking at vendors to provide vendor finding.

Ms Kwele said that the Council for Scientific and Industrial Research (CSIR) was its customer. Only Telkom was not a customer with regard to service providers. BBI had internet and regional customers.

BBI had employed disabled people if they were people who could provide services. With regard to the stretched targets, BBI has internally revamped its sales strategy. Revenue targets were a key issue. If funds were available, BBI could do much more. It was engaging with Small, Medium and Micro Enterprises (SMMEs), because this was a very technical sector.

BBI was improving with fund-raising each year. It showed funders that if it had a business case and customers, it had a track record to be able to deliver and use the funds. With regards to “unsigned” personnel, the company had a policy and not everyone could qualify for this. People needed to be in the company for over six months to receive performance bonuses. Only people with performance contracts would be considered. The bonus was based on company performance and individual performance. Managers scored people and senior management reviewed this. The board made a decision with regard to bonuses.

There were strategic and operational risks. BBI reviewed operational risks on a monthly basis. Risk reviews were in place to highlight big challenges. Ms Kwele was comfortable with the mitigation BBI had put in place to handle risks. It was working with the shareholder and it was not the norm to sit with shareholders every month, but BBI did it. National Treasury was invited to some of these meetings.

Ms Maponya referred to the funding strategy, and said suppliers were willing to provide vendor funding. This was not unique to BBI alone, as some other companies were also doing this. With regard to the accumulated deficit, it was the accumulated losses coming over to this year. BBI’s auditor was AGSA. With regard to audit fees, BBI had negotiated very hard with the current auditor to improve and get a reduced fee.

Ms Kwele said the legal proceedings had been settled. BBI had realised that if it continued, it would have spent more money on legal fees and thus it had decided to settle. BBI had done a productivity analysis within the organisation and intended to get 21 interns into the company. It was optimising and reviewing its capacity every six months.

The main reason for terminations was uncertainties. The other issue was that BBI was losing people to big mobile operators. It was a competitive industry. BBI tried hard to be open with workers.

With regard to risks, BBI was addressing that which was critical to the organisation and it continued to manage the mitigation of those risks. BBI needed to be transparent within itself. Mitigations were there and monitored by internal audit.

Ms Shinn was confused with regard to the value of the WAX investment reflected in the balance sheet.  Were there people who had been withdrawn? Why had the BBI not achieved its target with regard to WAX?

Ms Tsotesti said that the Committee was aware that the going was tough. She asked about the absenteeism from board meetings of Mr Van Niekerk, without notice. How did the BBI deal with such issues?

Ms Kilian said that if she read the BBI board members’ guide carefully, Mr Van Niekerk would need to be disqualified based on absenteeism issues. She asked for clarity pertaining to loans. If the Committee were to make a recommendation, what was it that it should ask for in the shareholder agreement so that it reflected correctly in statements?

Ms Kwele said that Mr Van Niekerk had attended all the meetings. He had not been an employee of the company previously. As a tier one investor, BBI had employees who attended WAX meetings. When BBI sent employees overseas, WAX paid the BBI back. The entity had kept employees within the committees to ensure that its interests were catered for. This was good for BBI as well. With regard to non-achievement, the statement said that BBI had a supply of wax which it had not sold.

Ms Shinn asked about the value of the investment.

Ms Mapanya said this was classified in page 70, note three, on network infrastructure.

Ms Shinn asked if BBI had a specific value of the wax.

Ms Kwele said it could send this to Members.

The meeting was adjourned.