SA Post Office on implementation on turnaround strategy and future prospects, with Minister & Deputy present

Telecommunications and Postal Services

31 January 2017
Chairperson: Ms D Tsotsetsi (ANC)
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Meeting Summary

The Minister of Telecommunications and Postal Services Siyabonga Cwele led the Department to discuss the implementation of the strategic turnaround plan for the Sthe South African Post Office (SAPO). The Minister said although the organisation was more than 100 years old it was not ageing but adapting to new challenges. In addition, he stated that while the organisation had struggled over the past year, it was grateful for the cash injection of R650 million it received from the Presidency and the National Treasury. 

During its presentation, SAPO said that it is making progress with its plan to corporatise Postbank and aims to conclude this in 2017. Preparations were also under way to register Postbank with the Companies and Intellectual Property Commission. Establishing the bank is one aspect of a multipronged strategy to modernise Sapo and put it on a profitable and sustainable footing in the face of the growth in digital communication. SAPO wants Postbank to be the agency chosen by the Social Security Agency of SA to pay social grants. SAPO was expected to make a net loss of R1.1bn, more or less in line with net loss of R1.2bn set in its corporate plan. Total revenue of R3.6bn was earned in the period to December as against the corporate plan’s target of R6.8bn for the full year. Although mail revenue at SAPO has seen a year-on-year decline of 6 percent, the organisation is confident that it will make a turnaround soon. A key reason for the declining business was that corporate customers were moving to online and courier solutions, reduced mailings and delays in the payment of critical suppliers.

Members asked about retail sales, if performance contracts have been signed, why box rentals were down, the burueacracy and theft at Johannesburgy International Mailing Centre, what Public Private Partnerships are in the pipeline, how to modernise and secure the IT systems, if more mobile post offices will be established, when SAPO will become profitable and why it was still renting from Eco Point, where its head-quarters is based.

Meeting report

The Chairperson welcomed everyone and noted the presence of the Minister and Deputy Ministe, officials from the Department of Telecommunications and Postal Services and the South African Post Office (SAPO).

All those present introduced themselves.

Remarks by Minister
Dr Siyabonga Cwele, Minister of Telecommunications and Postal Services explained that for the last few years the South African Post Office (SAPO) has been facing many challenges, but with the current Group Chief Executive Officer (GCEO) and new Group Chief Financial Officer (GCFO), SAPO is on the road to recovery. Because of its struggles and the need to pay creditors, SAPO was given a cash injection from the state for which it was grateful. SAPO is starting to focus on new businesses this year, with part of the strategic planning focusing on the internet. One of the key goals is corporatisation. The Department wants to align different postal legislation. Logistics was a problem as the main logistics company CFG presented challenges. The aim is to turn SAPO into a hub for e-commerce and logistics, as a new business model.

SAPO Post Office Corporate Plan, progress report and future prospects for Q3 (2016/2017)
Mr Mark Barnes, GCEO ,SAPO, informed the Committee that Post Bank is profitable and well capitalised, with the capitalisation process being on track. SAPO regularised its relationship with the Independent Communications Authority of South Africa (ICASA). There is early signs of customer confidence and trust returning to SAPO. Creditors have been paid. Labour matters have been settled, while the Johannesburg International Mail Centre (JIMC) has been cleaned-up as this is key for turning SAPO into a logistics hub.

He informed the Committee that the key areas of focus for SAPO in 2017 are receiving the SASSA grant distribution contract, the Postbank licence, increasing branch network and operational efficiency, launching a competitive courier business, investing to become the e-commerce hub of choice for Africa with plans to increase capacity at OR Tambo international underway. SAPO also aims to become the government’s delivery partner of choice. The mail business will only account for a third of SAPO’s business, with 2017 projected as being the year where the Postbank and e-commerce business come into their own, and will start defining the new revenue mix.

On a year on year basis mail revenue is down. SAPO has been busy though meeting with over 120 corporate clients that left SAPO. Big players are gradually signing over courier work back to SAPO. Bids have been put in for government business. R200 million is in the pipeline, with 25% of it being contracted. The JIMC was cleaned and reorganised by a 45 person team, so that it can run more efficiently and at maximum capacity, with many new systems, scanners and operational practices being used. By getting this sorted SAPO was able to start meeting with other companies, who have considered using SAPO as a logistics partner. On the retail side SAPO is fighting its competitors to gain back its market share. There has been an increase in retail revenue from last year. There were some network stability problems last year. Management structures in retail were also relooked at. SAPO is looking at placing its post boxes in new places such as petrol stations and areas that are generally more accessible. In terms of property revenue there has been an increase in property revenue, as a result of property sales, an increase in rental and the leasing out of unutilised space. SAPO is refurbishing and redesigning its buildings to attract potential clients, it is expanding the space at OR Tambo International by 71% to support e-commerce, and head office alternatives are being investigated, such as moving personal around, while the legal processes relating to the renting of the head office are currently underway. In terms of staff expenses and labour stability, since the strike in 2014 there has been a 20% reduction in staff. SAPO has a stable labour force, with a new recognition agreement currently being negotiated. The recruitment process for critical positions is currently underway.

When it comes to transport SAPO has decreased its expenditure on transport per annum by 30%, by boosting efficiency, with a more agile logistics mind-set around transport. The corporate plan forecast is mixed, revenue has declined significantly, on a net basis however SAPO is expected to meet its corporate plan. When it comes to the balance sheet, SAPO still has an extremely large amount of debt which needs to be paid. SAPO is however solvent and liquid, with cash being available.

He informed the Committee that key to SAPO’s future was the corporatisation of the Post Bank, with approval to establish the bank being granted by the SA Reserve Bank in July 2016. Preparations are currently underway to register the South African Postbank Limited entity with the Companies and Intellectual Property Commission (CIPC). The Postbank staff, operations and balance sheet will transfer from the Postbank division to the new entity after the incorporation process. The Postbank would allow and has the capacity to allow for broader financial inclusion for all South Africans.

SAPO/Postbank is uniquely positioned to pay social grants. In terms of ICT policy framework, footprint, and presence on the ground SAPO/Postbank is best positioned to take-over the SASSA contract. SAPO has quite a sophisticated E-commerce infrastructure with a large footprint which allows it to facilitate speedy connections and deliveries. This combined with the ports, vehicles and access SAPO has at the airport SAPO should be the E-commerce hub for Africa. Because of the partnerships and investment that is needed for this a Public Private Partnership will be required. Investments have been slow while SAPO has been trying to clean house, things are slowly picking up with 22 significant projects approved, with nine being in the implementation stage.

He informed the Committee that in order to rectify its audit problems SAPO is holding mock audits to check the results and go over them with the Auditor-General (AG) in the build up to the official audit, which should see an improvement in audit results. Generally despite 2016 having been a hard year, SAPO expects 2017 to be a good year.

Discussion
Mr C Mackenzie (DA) stated that SAPO has made many promises before about its turnaround strategy. He asked if in terms of the improvement of retail sales how much came from vehicle licence renewal, and how much of that was logistics and SAPO core business. Have all the performance contracts been signed including the CEO’s? Does SAPO have any mobile Postal Offices? He remarked that Mr Barnes had arrived with a lot of zest and new ideas, but he had not seen much of that coming through. When SAPO presented to the Committee a year ago one of the main revenue drivers was post box renewal, which he had doubted at the time. Given that post box renewal rental was down by 50% it must have impacted on mail revenue. What has been done to get that money back? Does SAPO have any idea what could speed up the processing and customs bureaucracy at OR Tambo International which slows down the delivery of mail. By when will the tracking system be refined?

Ms M Shinn (DA) asked if there were a lot of Public Private Partnerships in the pipeline especially with courier services, and if so what are the terms and conditions of those partnerships. She had concerns with the IT systems, and what was being done to address the security of IT systems.  Does SAPO have the money to recruit and retain cyber-security skills? Is SAPO getting support from the Skills Education Training Authorities (SETA)? What is the universal agreement agreed upon with ICASA? She asked that the term online malls be elaborated on, and if SAPO would be bidding for the Home Affairs Identity Document (ID) issuing card tender, given that it has the necessary footprint to do it.

Ms N Ndongeni (ANC) asked how many points of presence SAPO had. The JIMC had an issue with theft, what is being done to address this?

Mr T Manyoni (ANC) mentioned that R650 million was given to SAPO for recapitalisation, he asked how much of that amount was spent and what it was spent on? What has SAPO done to address the problem of the need for a skilled labour force?

Ms V Ketabahle (EFF) asked if SAPO had identified areas where it can insource to save money.

Mr Barnes responded that as far as motor vehicles licences are concerned they are up by about 7 million on the year. All the executive performance contracts have been signed except the GCEO, because the Board Chairman had resigned. SOPA does have six mobile post offices and some of the future opportunities should increase that number. It is wrong to say SOPA has had no innovations, look at e-registered mail, hybrid mail, and if you look at some of the logistics changes made, you will find below the surface a number of changes that took place. When you look at post boxes, SAPO had 620 000 renewals in December which is 50% up for the same period of the previous year. There are specific plans to move post boxes around, with a marketing campaign also being planned. Customs is a problem; there have been specific issues around custom charges. A lot of the areas of concern raised by Mr Mackenzie are slowly being addressed and fixed, but “you cannot reach for the stars unless your feet are firmly on the ground.” The problems at SAPO are deeper and harder than was thought, but it will be fixed and when it is fixed it will be fixed properly and sustainably.

Mr Barnes responded that when it came to Public Private Partnerships there have been many proposals, but in all honestly most of these proposals saw SAPO as a weak counter-party – they intended to exploit SAPOs infrastructure and take most of the economic benefits for themselve, in particular, the approaches made by courier companies. SAPO is stronger than that. SAPO had to find particular partnerships that compliments it rather than exploits it. Partnerships in the IT sector are very likely as SAPO given its size would not necessarily be able to keep up with the latest developments in the IT sector. There have been problems with the data centre and disaster recovery, those are being repaired now. There are currently negotiations underway to outsource the work of the data centre. There is no particular feedback on SETA. A submission has just been made to ICASA on the Universal Service Obligations (USOs). Online malls basically speak to the linking up with customers as a logistics supplier. Regarding Home Affairs, SOPA is on track to be fully up-to-date with that by March. In the worst case scenario SAPO has a cash-flow for 8 months. There is still theft at JIMC. Part of re-engineering the route parcels took and systems used at the JIMC allowed for better monitoring of packages. Theft at the JIMC is not endemic however and the levels have decreased. As far as the skilled work force is concerned, there are people wanting to work for SAPO. Interestingly enough there are young people wanting to work for SOPA.

Mr Mdu Zakwe, Board Member, SAPO, informed the Committee that the IT governance committee met around the issue of the data centre breakdown. At the meeting the breakdown was resolved. Hacking is an issue that affects South Africa as a whole. People are the weakest link when it comes to cyber space security. As long as the software is made in other countries, South Africa is vulnerable. Hacking has become even more complex, and the world is keeping up with these developments. South Africa needs to as well. Within SAPO efforts have been made to inform users of the potential dangers. There are measures in place to detect cyber-attacks. Currently the partnership with SETA is a Public Private Partnership. The tender to award the bio-metrics roll out around the country is underway.

The Minister informed the Committee that things are changing at SOPA with the work environment improving dramatically and simple things such as people not getting paid on time have ended. The current board members are very hands on and spend their spare time visiting post offices. The GCCEO has been exemplary; he spends time visiting the mail centres and post offices, and is not just in the office. So despite the many difficulties change is occurring. The government is not adverse to Public Private Partnership initiatives, but these should be partnerships that benefit both partners. The issue of moving out of the costly head-quarters which are being rented from Eco Point is of top priority.

Mr Mackenzie asked when SAPO will become profitable, and when the government will have to stop bailing it out. In terms of the Postbank corporatisation, corporatisation has been on the cards for a while, but the nature and needs of banking have changed. When last was an analysis done of the market and whether the services of the Postbank would match the ever changing needs of consumers? It is damning that SAPO is still paying rent to Eco Point for office space despite the Special Investigations Unit (SIU) investigating Eco Point. People in this country rely on grants for as simple a thing as putting food on the table, if SAPO were to receive the SASSA tender what would happen if the system went down? What sort of guarantee could SAPO give that their systems won’t go down?

Ms Ndongeni asked how far the tender for the network upgrade was and if SAPO has a plan of action to address the AG’s report.

Mr Barnes responded that there is no reason to revise the time table when it comes to profitability. SAPO expects to start trading profitably during the 2018 financial year. The issue around SAPO needing money speaks to the nature of the organisation, which is a turnaround one, that has lost R3.5 billion over the last three years. So the money received to be deployed in the Post Office is not new money just different money.

The mail business is not a monopoly but rather it is a highly competitive business. The enforcement of SAPOs reserve rights have not be in place. While corporates have replaced SAPO, they are a lot more expensive. SAPO is a low-cost producer. The only reason people have turned to the alternatives is because SAPO was a dysfunctional low cost producer. The Postbank is the most relevant and necessary organisation in South Africa today. As it would be a bank whose core purpose is financial inclusion; it is an extraordinary growth opportunity. It is the only bank in South Africa which has a socio-economic mandate. SAPO can not simply settle the legal issues with Eco Point commercially, as it is a State Owned Enterprise (SOE) and an arm of government. Therefore it is required to follow the proper criminal procedures as well as the commercial ones. SAPO is critically aware of the responsibility that would come with being in charge of social grants. There is progress on the SASSA tender. SOPA worked much closer with the AG than ever before, the year was stopped earlier to go through a rehearsal of the audit.
Mr Zakwe responded that the issue of resiliency is important. After the breakdown of the data centre it became clear that 100% uptime is something SOPA have to deal with moving into the SASSA space.

Ms Hlengiwe Mkhize, Deputy Minister of Telecommunications and Postal Services, noted the concerns raised by the Committee. She thanked the board members and said that there was a new sense of hope at SAPO, because of the new system put in place. The foundation has been laid. SAPO needs to market its new capabilities. SAPO is and needs to be part of the digital revolution and needs to be working with other departments around e-commerce. The issue of inclusive growth is important. Mobile post offices could be of great assistance, especially in the rural areas. She thanked the Chairperson.

The Chairperson thanked all those in attendance and adjourned the meeting.

 

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