SA Post Office on its 2015/16 Annual Report

Meeting report

Mr Simo Lushaba, South African Post Office (SAPO) Board Member, said this was one of the most difficult years SAPO has ever experience, stating that there has been a serious decline in services required.

South African Post Office Annual Results for the year ended 31 March 2016

Mr Mark Barnes, CEO: SAPO, reiterated that the 2016 financial year (FY) was an especially challenging year. Some of the main issues were: a lack of available capital, and a lack of confidence from suppliers, resulting in them not wanting to sign long-term deals.

For the financial year 2016 SAPO was forced to borrow money, because of insufficient operating capital. A large percentage of SAPO’s FY 2016 losses were a result of borrowing related costs. However, that regardless of the losses, SAPO was still solvent, and the company had value, both as an entity and through its property portfolio, and human capital. In addition, Postbank was quite successful.

Mr Barnes addressed the issue of poor SAPO operating efficiency, with some indicators giving it only 1/5. He did note however, that those indicators were for the FY2016, which ended in March, and that under his tenure a number of those indicators have been addressed.

Mr Barnes noted that the single most important negative perceptions of the SAPO was that they couldnot pay their suppliers and creditors, which affected business by driving away customers. As of October 7, 2016, SAPO has paid all of their creditors.

Mr Barnes, addressing the future of SAPO, argued that the capital operation procedure of SAPO was not sustainable because of their unequal debt to equity ratio, stating that more capital injection into the system was desperately needed. He noted that this issue was related to the interest SAPO paid for the FY2016 on its outstanding loans, which amounted to roughly R350 million.

Mr Barnes, addressing the future of SAPO, stated that itis on track to get a banking license, through which Postbank would able to leverage SAPO’s widespread infrastructure to be competitive as a banking organization. However, the process was quite lengthy, and would not be concluded for another nine months. Mr Barnes continued by noting that although Postbank could be a quite successful enterprise for SAPO, its courier service, Courier Freight Group (CFG) only gets 1% of the SA courier business.

Mr Barnes stated that the 2017 Financial Year (FY2017) should show some marginal improvement as corporate businesses, seeing SAPO current balance sheets, have had renewed confidence in the company. In addition, Mr Barnes stated that a number of steps were taken to make SAPO more competitive to corporate clients. For example, consolidated sales teams for larger clients mean that the full range of SAPO services, such as mail, banking, courier, etc., could be negotiated by a single sales team.

Mr Barnes argued that up until this point, SAPO has been trying to rebuild its foundation, but recently realised that it needed to be more aggressive in marketing itself, and competing with other mail services. This whole process of rebuilding had been a wakeup call, noting that SAPO was not a monopoly, and must be competitive to survive. SAPO used to decide on their pricing list by adding a target profit percentage to the cost, without regard for the market’s demands. Instead the market forced SAPO to reduce their costs, so that they were still returning a profit on their services, but that those services were now in line with what their competitors were offering.

Discussion

Mr C Mackenzie (DA) said year after year SAPO came forward, and each year there was discussion about the changes that needed to be made, and yet each year there were serious challenges left unmet. Although the FY2016 looked better than the previous one, when taking into account the four month strike the year before, he questioned if the FY2016 was really better.

Mr Mackenzie stated that an additional concern was the Johannesburg International Mail Centre (JIMC), in which all of the parcels were processed by hand, as the machinery was not running.

Referring to page 12 of the 2016 Annual Report, he questioned if the fact that 98% of Post Offices were reporting a waiting time of 7 minutes or less was accurate. In his personal experience visiting post offices in Limpopo, in every major post office the wait was much longer than 7 mins.

Referring to page 70 of the 2016 Annual Report, Mr Mackenzie’s was concerned that 42% of SAPO targets were “not measurable”, and 45% of indicators were “not well defined“. Many of the SAPO 2016 Annual Report targets were either not measurable, or verifiable. What was the Post Office doing this year to make sure that it met SMART?

Mr E Siwela (ANC) asked if the employees who did not choose not to leave SAPO felt secure in their future with SAPO; and if leadership in SAPO has improved.

Ms N Ndongeni (ANC) note in the last report there was an issue of SAPO receiving unqualified audit information. She asked whether that had been rectified.

Ms M Shinn (DA), noted that there were systems failures, staff failures, etc. She asked for clarification on what was being done to rectify these issues, noting that SAPO lost a lot of qualified staff. In addition, she asked for clarification on the internal crime statistics, noting that there was an increase in the amount of money lost through armed robberies. Of the 498 cases referred to the SAPS for investigation, and asked how many went to court?

Referring to the Public Finance Management Act (PFMA), Ms Shinn asked if SAPO would benefit from a restructuring that would create more of a public/private partnership, asking if it would it help SAPO become more competitive.

Ms D Tsotetsi (ANC) asked for a general assessment on whether SAPO was going to be able to reinvent itself, and become a successful government institution.

The Chairperson said reading the Audit General’s (AG) report, it did not give hope at all. She had a personal experience when she went to renew her driver’s license, they could not help her. They could not print her papers, and they could not photocopy her driver’s licence. There were always queues at the busy locations, and if you could not help people, you could not make revenue.

She expressed concern about the number of post offices closed, numbering 221 according to the report. She asked for clarification on the location of these post offices, and the impact of their closure on the overall business. She asked if a conscience decision was taken to close, or if it was because those locations were not making money. Was the Post Office forced out of the market, in an area where they would otherwise make money?

The Chairperson noted that SAPO was sitting at a 22% achievement rate in terms of their targets. The majority of the issues that were raised last year were still coming up. She questioned if SAPO’s figures were reliable, noting that the Committee was given assurances that this information was correct. She asked for a clearer sense of what was happening, and for the delegates to reassure the Committee that there was hope for this institution.

Mr Barnes responded to Mr McKenzie’s question by noting that the machinery in the JIMC had never been up and running, and the cost to get it running was roughly R15 million, and this led that hub to get down-rated from an A level, to B level facility. In addition, the time that it took to process parcels at JIMC was only at 40% of optimal levels. SAPO was using computers that were 10-15 years old, and the scanners did not always function properly, which led to a massive backlog.

Mr Barnes said the seven-minute wait time must be a statistical aggregation, with the many smaller post offices with shorter waiting times, making up for the longer wait times at the larger locations.

Addressing the question of SAPO’s internal audit procedures, Mr Barnes acknowledged that there was a lack of discipline to get the job done, noting that when the organisation doesn’t see a future for itself, there was less incentive for its employees to work hard, and do a good job. He believed that SAPO had turned a corner in the minds of both their employees and clients.

Mr Barnes argued that SAPO was at a competitive disadvantage because of the time it took SAPO to introduce a new service compared to competitors such as DHL. In addition, competitors, such as DHL, could introduce a service, and because they did not require public oversight, they could bring that service to market far more quickly and efficiently. SAPO on the other hand required more oversight and accountability to the public as a government entity, and therefore could not adapt as quickly to changes in the market. With that in mind, perhaps the Telecom model may be an option worth looking into for SAPO in the future.

On the question about management, at middle management level there were people who were quite dedicated to SAPO and its future. In addition, in August 2016 SAPO appointed a new board of directors, who were very dedicated to SAPO and quite competent. The leadership stability had changed.

Mr Barnes said he needed to see contracted revenue to see contracted expenditure, arguing that they had a differed expenditure issue.

Answering Ms Shinn’s question, he was unsure how many of the 498 cases had gone to court.

On the Chairperson’s concern about the future of SAPO, noting that there were positives in the business, he argued that SAPO had a one-third business split, with a third of the business coming from each of the three sectors: mail, ecommerce, and financial services. This model was proved to be successful the world over, in both developing and developed countries. Both India and Russia employ this model with great success.

Mr Barnes answered Ms Tsotetsi’s question saying he thought it would survive but he did not think it would happen this year. He did not believe that SAPO would be profitable before 2018 financial year. SAPO could be a real force in the small business and under-banked sectors of South Africa, but without the support of National Treasury and the Reserve Bank, SAPO’s long-term outlook was bleak. Although the courier service was the most profitable sector of SAPO’s business, they still severely lag behind their competitors, and would not survive without private partnership. The courier clientele saw SAPO as a relevant option, and with some restructuring, could retake some of the lost market share. To do that however, SAPO needed to partner with the private sector. In doing so, SAPO could offer usage of their well-developed infrastructure, while taking advantage of a private sector firm’s technological capacity.

Addressing The Chairperson’s questions about post office closures, Mr Barnes said the report was misleading, only 22 offices were closed permanently. The others were closed on a provisional basis, and had since reopened. Of those 22 that were closed, most were a result of disputes with the landlords, and offices were reopened at a later date in the same area.

A SAPO delegate stated SAPO had strengthened its position with regard to technologies that could be revenue generating, and had created the position of Senior Technology Officer as a full-time senior-level position focusing solely on implementing new technologies in the SAPO system.

Responding to the question from Mr Mackenzie concerning the number of internal SAPO targets that were not measurable or quantifiable, it was found found that many of the target objectives were not identifiable because a clear corporate plan was not in place. That had since been rectified. Internal auditors had assisted with the task of making key performance indicators (KPIs) more easily identifiable and manageable.

On financial records, SAPO had agreed on a nine-month financial statement, with a three-month rollover. This system had been tested for reliability and accuracy by the internal auditors. Another financial issue was the lack of regularised contracts in the supply chain, making financial record keeping difficult and unreliable. This had also been streamlined, through an identification of the transgressors in the SAPO system, through more aggressive financial discipline, and partial automation of the financial reconciliation process.

The SAPO delegate (Mr Lushaba?) also noted that in the rural areas, there was an issue with a lack of standardisation of the operating procedures. This was being rectified through standardising procedures across the SAPO system. The main issue here was system-wide mistakes made by tellers in the way they captured information. This should be rectified in the standardisation process.

Mr Barnes said there was still another albatross that SAPO was dealing with. The issue of using loans to keep the company afloat was very bad. There was still an effort required to see how those loans could be reduced, as using loans to turn around an ailing company was not a sustainable long-term solution. In addition to the issue of loans, SAPO was struggling with how to make sure that SAPO regained confidence.
On post office closures, there was an error in the report, with 221 post offices affected, but only temporarily closed. 34 were closed permanently, 12 of which were for network optimisation, and the remaining 22 were rental disputes. (higher up he said 22 were closed permanently)

Ms Shinn asked for clarification on how much operating cash SAPO had on hand, and for how long they could continue to be solvent if another crisis were to develop.

Ms Tsotetsi asked for clarification on what lessons the Senior Staff of SAPO had learned from this extended crisis, noting that if SAPO were to move beyond this, it would only do so through a serious evaluation of the issue and an implementation of the lessons learned.

Mr E Siwela (ANC) asked if the post office was ready for digital services.

The Chairperson asked that the SAPO delegation give an explanation on what SAPO had done to reduce and streamline their operating costs. There seemed to be a lack of investment in the future of SAPO, indicating the backlog at JIMC and the corresponding lack of tools to help clear it up.

The Chairperson stressed that it was highly unlikely that SAPO would receive another government bailout, and that if they were going to be successful they had to do it internally. Mr Barnes bore the responsibility for changing the environment. Referring to the mistakes in the 2016 Annual Report, she questioned why he continued to tolerate employees that were not able to put together a proper document. She asked if he believed SAPO had the right people at middle and upper management to help turn this company around, arguing that middle and upper management were the people that had to have the drive to change SAPO.

Addressing the issue of poor internal audits, the Chairperson said it had to come a point where certain things were going to be unacceptable; an unclean audit was not going to be acceptable.

Mr Barnes responded that SAPO did not need to borrow R3.7 billion, but rather needed an equity injection. SAPO had a socio-economic mandate to provide a government service, but nonetheless did not get subsidies. This made it difficult for it to be profitable in a free-market economy. In addition, he argued that government promised to give SAPO 30% of its business, but so far SAPO had not received any contracts from government institutions, which should amount to R600 million that SAPO would not receive.

Mr Barnes argued that SAPO could be one of the solutions to inequality.

Mr Barnes responded to the Chairperson’s inquiry about investment in the future, saying that SAPO had not invested in the future until it was certain that it had a solid foundation in place. Doing so beforehand would not be prudent, and there was a very real worry that it could run out of available capital. SAPO has 14 months of available capital.

Regarding the uncompetitive nature of government institutions, when CFG was propped up, it saved 700 jobs. Had SAPO been a private entity it would not have made financial sense to do that, and instead SAPO would have liquidated CFG.

Mr Barnes said responses he received from National Treasury were not positive. They told him to tell them how much capital he needed to keep SAPO afloat, but were not interested in plans to help finance SAPO’s future, or reinvest in the institution, as other governments such as India and Russia had done.

Mr Barnes, arguing that SAPO has an important role to play in South Africa, said online delivery had made physical delivery an important service once again, and SAPO has the best infrastructure in South Africa to handle that demand. In addition, with that infrastructure, and with Postbank operable as a bank, SAPO could reach an entire sector of South Africa that was hugely underbanked.

The Chairperson noted that they asked other government departments if they did business with SAPO. Many did not because they could not rely on SAPO. SAPO carried the burden of a damaged brand, and if SAPO did not have the ability to handle small things, how could it be trusted with bigger tasks.

Ms Nicola Dewar, acting CEO: SAPO, responded to how SAPO has reduced costs. They have done a number of things. Firstly, SAPO has rationalised transport costs, for example, they had combined the transport costs of the different departments, and now Mail, Courier, and Sales were all combined whenever possible to save on fuel, and equipment costs. Secondly, SAPO had implemented moratoriums on things like overtime, and restricted travel to only when necessary. Lastly, SAPO had offered early retirement plans, and while not meeting the initial goal of 4,000 people, 800 employees had accepted that plan. However, the smaller number of employees accepting that plan was a positive in that their employees saw hope for the future of SAPO and wanted to stay on.

Mr Lushaba argued that Postbank was a very profitable entity, but because of a 2004 court ruling, they could not operate as a bank, and could not remove the deposits in Postbank as a bank would. However, once the Postbank was fully licensed, SAPO could use those funds to reinvest. In addition, Postbank could add more services once it became a fully accredited bank.

Addressing what lessons had been learned, Mr Lushaba noted that the key one was that SAPO must make painful decisions, hard decisions. There was every commitment to turn around SAPO, and that senior management and the board were addressing key issues at a foundational level, making sure that they could keep the promises they made, and then deliver on those promises.

Addressing questions about the future, Mr Lushaba stated that SAPO would get customers back, however they may not necessarily be buying the same thing. SAPO wanted to offer new services that would attract new customers. For example, SAPO was introducing a tracking system that would make it possible to track packages both nationwide and worldwide. It was darkest before the dawn, arguing that a lot that was happening on the ground.

Returning to the issue of lessons learned, Mr Lushaba stated that one of the hard decisions was to stop pursuing business ventures that SAPO did not do well, and focus on the things that it had the capacity to be competitive doing.

Mr Mackenzie, responding to Mr Barnes, said he recognised that he had a lot of passion for SAPO and acknowledged that Mr Barnes wanted to see it succeed. He asked for clarification on a number of points. Firstly, he asked about bonuses, and who was receiving them. Secondly, he asked about the salary adjustment when CFG was absorbed into SAPO, when the 700 jobs were saved. Thirdly, he asked for an explanation on the decline in SAPO’s courier business. Fourthly, he asked if SAPO was trying to recapture business from people who had moved to entirely digital mail service provision.

Ms Dewar, clarifying the issue of bonuses, said it was an accounting issue, with some employees contractually obligated to receive a 13th check, which was noted as a bonus. Some lower level employees also received a Christmas bonus. Upper management receives no bonuses.

Addressing the issue of CFG salaries, CFG staff received a 6.5% increase in salary to bring them in line with SAPO salaries.

Mr Barnes, responding to Mr Mackenzie’s question about the switch from physical to digital post, stated that SAPO does not see post-boxes as dead, but that how they were used needed to change. With 50% of the four million post-boxes still used, there was value in still using them.

The Chairperson said National Treasury’s disregard for SAPO was concerning, especially because it was a state entity, and because of the human capital that would be affected if SAPO were put out of business

The meeting was adjourned.