SITA, USAASA, SAPO & BBI on their Annual Performance Plans

Telecommunications and Postal Services

09 May 2017
Chairperson: Mr E Siwela (ANC)
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Meeting Summary

The Committee heard briefings from the State Information Technology Agency (SITA) as well as the Universal Service and Access Agency of South Africa (USAASA) and the Universal Service and Access Fund (USAF) on its Strategic Plans and Annual Performance Plans (APPs) for 2017/18.

The State Information Technology Agency said the Information Technology (IT) spend of the South African government increased and was high compared to other countries, but that in the area of IT training, South Africa was still lagging behind other countries. There were still challenges with the usage of ICT by Government as reflected in the statistics, which was why SITA was not doing well. He said the South African e-government ranking took a leap from position 93 to 76 but that Government IT spending was not yielding the desired results overall. There was significant improvement on the Network Readiness Index ranking from position 75 to 65. He said that SITA looked at the distribution of Government financial and human resources, across the spectrum of services that SITA provided, and noted that human resources were concentrated in areas that maintained existing operations. He felt that everyone would benefit from directing more spending into areas that added new capabilities within Government and improved service delivery to the public via a SITA that was strong in cross-departmental application development, strategy, planning, architecture, standards, advisory services and security. SITA would thus focus on delivering against a consistent and compelling value proposition to resolve core issues sustainably. It would focus on value added procurement, core IT services, e-government, cyber security, healthy organisational wellness and business enablement. Gross revenue was expected to be R6.3 billion, with an expected gross profit of R1.3 billion, while operating expenses was set to be R1.2 billion.

The Universal Service and Access Agency of SA (USAASA) board added three board members to fill gaps in the board to cover financial, auditing and corporate governance areas. With the addition of the board members and the addition of a new Chief Financial Officer late the previous year, USAASA was geared to accomplish what was required of it in terms of the Annual Performance Plan, and that delivery was important for USAASA this year. USAASA would be pushing for collaboration this year to allow it to achieve its objectives within its budget. USAASA spoke to the Business Support and Business Intelligence Programs and gave a reconciliation of the performance targets with the budget. Total expenditure was expected to be R73.9 million for business support and R1.7 million for business intelligence.

The Universal Service and Access Fund’s (USAF’s) strategic goals were increased connectivity to underserviced and un-served areas, increased rollout of electronic communications infrastructure in underserviced areas, increased access to digital broadcasting services, and increased digital literacy to stimulate end–user demand through sustainable community broadband services. Some of the targets of USAF were conducting three ICT training programs, providing infrastructure to two underserviced municipal areas, deploying 40 free Wi-Fi hotspots and procuring 181,400 Set Top Boxes (STB’s). Total expenditure was expected to be R133.7 million for 2017/18.

Members asked if the fact that USAASA would be going to Mpendle and O.R Tambo municipalities meant that the other municipalities on the previous list were excluded. Members hoped these municipalities would not suffer the same fate as Albert Luthuli municipality. They asked if the 40% target set for brand awareness was not too low as people needed to be aware of USAASA’s activities. Members asked why the plan to catch up on the distribution backlog of Set Top Boxes was not part of the Annual Performance Plan. How would the Committee be able to monitor it, if it was not part of the Annual Performance Plan? Members asked SITA how the reduction in staff employees would impact on its job creation mandate. What would the expected return on investment be, given that SITA’s budget increased to R1.2 billion? Members asked USAASA if it was confident that the Universal Service and Access Fund would be used correctly. Members also wanted to know if USAASA was on target to reach the SIP 15 target of 100% connectivity by 2020. Members questioned whether USAASA’s target for research paper to be completed was part of USAASA’s function and if USAASA had the skills and capacity to project-manage tender documents. Members asked if corrupt elements in SITA were identified.

Members questioned the correctness of the numbers given in the USAF document for project costs and what happened to SA Connect. They felt that Mpendle was not listed previously as a KZN site for connectivity. Members said the target set for staff improvement was very low. They also asked if there was any clarity on statements made by the Ministers of Telecommunications and Postal services and of Communications on connecting people to the internet after a recent meeting, as no details was given afterwards. Members added that the Minister of Communications was supposed to have given the total project costs of Set Top Boxes.

Members said SITA made no mention of the Chinese company, Innsburg and wanted to know what discussions were taking place between the two. What was SITA doing to attract and retain ICT security skills? Members felt that no one could be happy with USAASA setting a customer satisfaction target of 50%. An oversight visit to a USAASA project in Mpumalanga showed how USAASA operated and that based on that evidence the Annual Performance Plan was not a credible implementation plan. Members said the STB numbers for 2017-19 did not make sense and wanted clarification. Members asked if SITA had seen any benefits regarding the changes in the order procurement system. Was there uptake of the use of the ICT portal? Members said SITA had a large role in e-government services and asked if SITA was comfortable and able to deliver because the timelines that were given were very tight.

Members asked why the salary budget was so large compared to the goods and services budget of 37%. They also wanted to know what the challenges were that prevented the attainment of at least 90% customer service levels and if there were challenges, was there a strategy to advance to the 90% level. Regarding the USAASA salary bill, Members asked if that would not impact negatively on it achieving its targets. Members also asked how reasonable the SITA rewards were.

SAPO’s net financial position still remained challenged with a year to date net loss of R1.33 billion with a negative variance of R186 million for the year against a targeted net loss of R1.15 billion. This has been a difficult trading year that still left SAPO challenged to achieve the existing baseline revenue targets whilst creating a conducive environment for growth.

The revenue lag resulted in R1.14 billion shortfall to match operating costs. The cost compression initiatives had resulted in budget savings of R1.06 billion for the year on operating costs which are at R5.67 billion, down R68 million from the prior year R5.93 billion. Creditor outstanding backlog balance for the 2015/16 financial year was R124 million from the R899 million at March 2016. The consolidated balance available from the term loans was R687 million. Total set-top box (STB) installations completed was 36 999 and 149 145 qualifying recipients were registered as at 31 March 2017. The Independent Communications Authority of South Africa (ICASA) has approved the 2017/18 Price Cap Tariff Proposal of 9.3%. The total staff headcount as at 31 March 2017 has been reduced by 2 052 to 18 729 from 20 781 in March 2016.

Other challenges facing SAPO included revenue leakage from inadequate enforcement of legislated monopoly in the 0-1kg space, acquiring and maintaining appropriate skills, outdated IT infrastructure and damaged brand. Enabled by technology and/or market conditions, new players such as large retailers are now entering the courier sector. The organisation will be profitable by the 2018/19 financial year.

In terms of the financial plan, SAPO was targeting a net profit of R87 million for the 2017/18 financial year. With current capital structure, SAPO will spend over R 2 billion in interest payments over the next six years. SAPO was targeting a 50:50 debt/equity ratio to ensure an appropriate capital structure. The current debt funding will be replaced with equity funding from government as a means of reducing the interest burden on SAPO. Capital injection for SAPO will be considered during the 2017 mid-term budget process. If SAPO relied only on debt funding, the company will be in a position to only settle its loans in the 2022 financial year. This meant that the loan guarantees would have to be rolled over at the end of the current 3-year loan period for another 3 year period. The total interest paid until the end of the period will be over R 2.2 billion or 60.6% of the R 3.7 billion loan capital amount that was borrowed.

Members welcomed presentations, but asked clarity on how the projected revenue increase will be realised, how BBI’s national revenue almost doubled, if the R400 million invested in infrastructure was going to stabilise the system. The Committee also asked on the growth of income stream, which obviously needed private sector investment. They wanted to know if such a proposal had been submitted to the Minister and what the nature of that proposal was.

The Committee asked what regulatory stumbling blocks that needed to be amended are in the way of private sector investment, why the BBI report was marked confidential if it was a public document and why the strategic goals of BBI lacked detail in terms of strategic partnerships.

Other questions from the Committee included the huge operating expenditure increase, the criteria to train SMMEs, the percentage of black-owned companies and opportunities for people with disabilities.

 

Meeting report

SITA
Dr Seitumo Mohapi, Chief Executive Officer, SITA, said that the IT spend of the South African government increased and was high compared to other countries, but that in the area of IT training, South Africa was still lagging behind other countries. There were still challenges with the usage of ICT by Government as reflected in the statistics, which was why SITA was not doing well. He said the South African e-government ranking took a leap from position 93 to 76 but that Government IT spending was not yielding the desired results overall. There was significant improvement on the Network Readiness Index ranking from position 75 to 65. He said that SITA looked at the distribution of Government financial and human resources across the spectrum of services that SITA provided, and noted that human resources were concentrated in areas that maintained existing operations. He felt that everyone would benefit from directing more spending into areas that added new capabilities within Government and improved service delivery to the public via a SITA, that was strong in cross-departmental application development, strategy, planning, architecture, standards, advisory services and security. SITA would thus focus on delivering against a consistent and compelling value proposition, to resolve core issues sustainably. It would focus on value added procurement, core IT services, e-government, cyber security, healthy organisational wellness and business enablement.

He said the implementation of the strategic plan was through five key strategic programmes, which were service delivery, infrastructure and procurement, financial sustainability, organisational governance and administration. Implementation of the strategic plan also took place through 23 strategic initiatives.

He spoke to e-government and infrastructure modernisation. He said that the procurement strategy leveraged on economies of scale and driving automation to reduce administrative tasks. As SITA was considering the state of procurement in government currently, he said it was imperative that SITA consider government’s objectives for automating processes and investing in procurement IT solution. Hence, SITA was changing its approach to supply chain management to drive greater operational and cost efficiencies through automated procurement, commodity sourcing, strategic sourcing, specification development, tender administration and demand management. The supply chain automation system was launched and was now supporting the sourcing of end-user computing and communications devices and consumables. He said SITA was committed to Small Medium and Micro Enterprise (SMME) growth and was developing a defined strategy to attain this. SITA was starting to be more efficient and therefore offered an improved value for money proposition.

He spoke to the strategic plan, which was aligned to the changes in the performance environment and presented the changes to the plan. He said the number of performance indicators was reduced from 25 to 14, with two new indicators on net collection rate and employee satisfaction. He spoke to the revised medium term targets for the Service Delivery Programme and the Infrastructure Programme.

Ms Rudzani Rasikhinya, Chief Financial Officer, SITA, said that gross revenue was expected to be R6.3 billion, with an expected gross profit of R1.3 billion, while operating expenses was set to be R1.2 billion.

Universal Service and Access Agency of SA (USAASA)
Mr Mawethu Cawe, Chairperson of the Board, USAASA, said USAASA’s board had an additional three board members to fill gaps in the board to cover the financial, auditing and corporate governance areas. He said that with the addition of the board members and the addition of a new CFO late the previous year, USAASA was geared to accomplish what was required of it in terms of the APP and that delivery was important for USAASA this year. USAASA would be pushing for collaboration this year to allow it to achieve its objectives within its budget.

Mr Lumko Mtimde, CEO, USAASA, spoke to the programmes of the organisation, that of Business Support (Programme 1), Business Intelligence (Programme 2) and gave a reconciliation of the performance targets with the budget. Of interest was that in Programme 1 as it was aiming to achieve a beneficiary brand awareness level of only 40% and a stakeholder satisfaction level of only 50%.

Mr Mohammed Chilwan, CFO, USAASA, said total expenditure was expected to be R73.9 million for business support and R1.7 million for business intelligence.

Universal Service and Access Fund (USAF)
Mr Mtimde said that USAF’s strategic goals were:

- Increased connectivity to underserviced and un-served areas
- Increased rollout of electronic communications infrastructure in underserviced areas
- Increased access to digital broadcasting services and
- Increased digital literacy to stimulate end–user demand through sustainable community broadband services

He outlined where USAF’s funding activities took place and said it was in the backhaul, last mile and user devices area of operations. Some of the targets of USAF were conducting three ICT training programmes, providing infrastructure to two underserviced municipal areas, deploying 40 free Wi-Fi hotspots and procuring 181,400 STBs.

Mr Chilwan said total expenditure was expected to be R133.7 million for 2017/18.

Discussion
The Chairperson asked if the fact that USAASA would be going to Mpendle and O.R Tambo municipalities meant that the other municipalities on the previous list were excluded. He hoped these municipalities would not suffer the same fate as Albert Luthuli municipality. He asked if the 40% target set for brand awareness was not too low as people needed to be aware of USAASA’s activities. He asked why the plan to catch up on the distribution backlog of Set Top Boxes (STBs) was not part of the APP. How would the Committee be able to monitor it, if it was not part of the APP? He asked SITA how the reduction in staff employees would impact on its job creation mandate. What would the expected return on investment be, given that SITA’s budget had increased to R1.2 billion?

Ms J Kilian (ANC) asked USAASA if it was confident that the USAF fund would be used correctly. She asked if USAASA was on target to reach the SIP 15 target of 100% connectivity by 2020. She questioned whether USAASA’s target for the research paper to be completed was part of USAASA’s function. She asked if USAASA had the skills and capacity to project-manage tender documents. She asked if corrupt elements in SITA was identified.

Ms M Shinn (DA) questioned the correctness of the numbers given in the USAF document for project costs. She asked what had happened to SA Connect. She said Mpendle was not listed previously as a KZN site for connectivity. She said the target set for staff improvement was very low. She asked if there was any clarity on statements made by the Ministers of Telecommunications and Postal Services and of Communications on connecting people to the internet after a recent meeting, as no details had been given afterwards. She added that the Minister of Communications was supposed to give the total project costs of STBs. She said SITA made no mention of the Chinese company, Innsburg and wanted to know what discussions were taking place between the two. What was SITA doing to attract and retain ICT security skills?

Mr C Mackenzie (DA) said no one could be happy with USAASA setting a customer satisfaction target of 50%. He said that an oversight visit to a USAASA project in Mpumalanga showed how USAASA operated, and that based on that evidence, the APP was not a credible implementation plan. He said the STB numbers for 2017-19 did not make sense to him and wanted clarification. He asked whether government departments were an obstacle to what SITA wanted to do, given the fact that SITA was expanding its operations across government. When would there be a comprehensive ICT skills audit on government departments’ ICT skills? He asked if SITA saw any benefits regarding the changes in the order procurement system. Was there an uptake in the use of the ICT portal? He said SITA had a large role in e-government services and he asked if SITA was comfortable and able to deliver because the timelines that were given were very tight.

Ms N Ndongeni (ANC) asked why the salary budget was so large compared to the goods and services budget of 37%. She asked what the challenges were that prevented the attainment of at least 90% customer service levels and if there were challenges, was there a strategy to advance to the 90% level.

Ms D Tsotetsi (ANC) said that regarding the USAASA salary bill, if it would not impact negatively on it achieving its targets.

Mr Cawe said that USAASA owed the Committee a report on the oversight visit to Mpumalanga and as soon as it was completed, it would be forwarded to the Committee. He said that the issue of Human Resources was very serious. He said there were members of management who were also members of the Communication Workers Union. One could not have union members as part of management because there was a conflict of interest.

He highlighted that USAASA had to deal with change management because there were people at USAASA who was doing the same thing for a long time and did not want to change, resulting in USAASA not achieving their targets. Performance initiatives would be instituted.

He said Minister Cele was excited at the deliberations USAASA held with him and Minister Dlodlo present. Arising from this meeting, some officials might be fired. He said that the new Minister of Communications, Ms Dlodlo, that meeting as a fact finding meeting on digital migration and had asked a  number of questions for clarification. She would make her announcement soon and USAASA would then follow the direction given.

Mr Mtimde said that USAASA was not ambitious in setting targets and was setting smart targets because there were legacy issues that first needed to be resolved at USAASA. He said that Broadcast Digital Migration targets were USAF’s biggest issue. He added that work on the 2016 backlog of STB distribution would form part of the quarterly report and this would be how the Committee could monitor that work.

He explained that Human Resources were USAASA’s biggest challenge and that USAASA was developing a strategy to manage it. He said that the 2020 SIP 15 target was not a target for USAASA solely, and that there were other role-players who were also bound by the same target. He said that USAASA was mandated by law to do research. He said that one of the things learnt from the project at Mpumalanga, was that a network management system was needed.

He commented that Mpendle was a new addition to the list because the Minister asked that it be included because of challenges at that municipality. USAF asked for extra funds but did not received them. USAF would report to the Committee when the review of costs had been completed.

He said that USAASA also wanted 100% customer satisfaction targets, but that there were HR and legal challenges that made such a percentage unattainable at present. He explained that USAASA had put in a training programme into the APP and aligned it with that of the National Electronic Media of South Africa’s (NEMISA’s).

Mr Chilwan confirmed Ms Shinn’s query about the numbers in the presentation and said that the inclusion of the additional three zeroes were an error it should be read as millions not billions. Regarding the cost of STBs for the years 2017-19, he said that the cost of a STB package varied based on the content of the package which could differ as it had elements such as the satellite dish which varied with different types of STBs and that some STBs included a sim card, hence the use of average figures.

He acknowledged that the compensation of employees’ percentage of the total was high but this did not take into account the fact that USAF had no compensation of employees’ package. If this was taken into account, it then gave an accurate reflection.

Regarding job creation, Dr Mohapi said that the overriding factor was that SITA identified what could be done more efficiently. It should operate efficiently rather than just filling vacancies. There was a vast opportunity for job creation outside of government, for example in outsourcing the digitising of government forms.

He said there was willingness by government departments to implement e-government. The key was for SITA to play its role. SITA wanted to be the body that provided business solutions to government whereas currently, its work only focused on providing IT solutions to government. He said it would be naïve to think that there would not be some resistance in the move to e-government.

He explained that SITA instituted forensic investigations and already found issues. Some people were already dismissed and cases were sent to SAPS and the Hawks. On the question around central procurement, he said SITA was linking itself with the Central Supplier Database of National Treasury.

He said that SA Connect’s role was defined by the SITA Act and that the State had to have its own network. The role of SA Connect was to be a service provider where the first user was government. That role was still the same. SITA did not put targets for SA Connect because the Department remained the lead body.

He said that there were two discussions with Innsburg regarding data centres and the discussions were still at the initial stages. He admitted that SITA, as a brand, was not strong. However, SITA needed to sell itself as a SITA of the future, where it provided business solutions rather than the current IT work only that SITA was mainly doing. He explained that SITA’s capacity to expand was limited by the old software methodologies that it had. He said there would be a meeting in June where government departments would hold a brainstorming session on e-government.

He said there was a big gap between what government departments asked SITA to assist with and what SITA currently provided in the form of IT services. SITA’s operational model needed to change for SITA to become more of a consultant for business solutions rather than purely an IT service provider. This would mean that on the technical side, SITA would split its work into two sections, that of hosting and that of network infrastructure. In this way, it would also be able to increase its customer satisfaction levels. Regarding infrastructure, he said that SITA forwarded a proposal because SITA’s job was to produce things government wanted and could not get elsewhere like for example, cloud computing.

Mr Mackenzie asked that in future USAASA breakdown the number of STBs into its constituent parts, STB, dish, sim card, etc.

Ms Kilian asked how a record was kept of the rollout of SA Connect sites without connectivity.

Ms Tsotetsi asked how reasonable the SITA rewards were.

Mr Mtimde said USAASA had discussions with the Department. A digital summit would be convened and aimed at stimulating discussions and also to get more funding. Regarding consequence management, senior managers left, people were being disciplined, and actions were currently unfolding in this regard. There would be further actions taken after the investigations had been completed. Investigations were occurring even in cases where people had resigned and criminal processes would follow if necessary.

Dr Mohapi replied that the network was not operating as it should be, but that this was not because of the network, but rather it was the inability to manage the network environment. He said the rewards system in place was not good but that SITA had not completed its comprehensive review of the program.
 

Briefing on SAPO Corporate Plan and APP

Mr Mark Barnes, CEO, SAPO, said the report will look at the progress made up until to 31 March 2017, focusing on a status overview, achievements for the 2016/17 financial year and the Postbank corporatisation update. In terms of the Corporate Plan 2017/18 to 2019/20 the report will focus on the key challenges; the future of SAPO, strategic goals and themes and key focus areas for the 2017/18 financial year.

Mr Barnes said the net financial position still remain challenged with a year to date net loss of R1.33 billion with a negative variance of R186 million for the year against a targeted net loss of R1.15 billion. This has been a difficult trading year that still left SAPO challenged to achieve the existing baseline revenue targets whilst creating a conducive environment for growth. Despite the seasonal renewal of post-boxes total revenues of R4.73 billion, it performed marginally below the prior year of R4.83 billion.

The revenue lag resulted in R1.14 billion shortfall to match operating costs. The cost compression initiatives had resulted in budget savings of R1.06 billion for the year on operating costs which are at R5.67 billion, down R68 million from the prior year R5.93 billion. Creditor outstanding backlog balance for the 2015/16 financial year was R124 million from the R899 million at March 2016. The consolidated balance available from the term loans was R687 million. Total set-top box (STB) installations completed was 36 999 and 149 145 qualifying recipients were registered as at 31 March 2017. The Independent Communications Authority of South Africa (ICASA) has approved the 2017/18 Price Cap Tariff Proposal of 9.3%. The total staff headcount as at 31 March 2017 has been reduced by 2 052 to 18 729 from 20 781 in March 2016.

In terms of achievements in the 2016/17 financial year, a R3.7 billion loan facility was finalised, incorporating the prior R10 billion. Government’s going concern guarantees were consolidated and are coterminous with the loan facility. Creditors backlog was settled and the accruals backlog reduced by 90%. Mail revenue was stabilised with early signs of customer confidence and trust returning to SAPO. There was a Johannesburg International Mail Centre (JIMC) cleanup, clearing of mail backlogs and 15 mail machines were brought back online. Retail branches are operational. Transport routes have been optimised and the frequency of trips was reduced from 6 to 5 days on all national routes. The integration of the Courier Freight Group (CFG) subsidiary into SAPO was initiated. A joint settlement agreement with the recognised trade unions was reached resolving a number of legacy labour issues. CFG staff was absorbed by SAPO on existing terms and conditions of service. A voluntary separation program was implemented resulting in 768 additional employees leaving the organisation during the year and regular engagements with trade unions resulted in labour stability.

On Postbank corporatisation, Mr Banks said Section 13 approval to establish the bank has been granted by the South African Reserve Bank (SARB) in July 2016. The Postbank board was appointed in March 2017 and the company incorporation documents have been lodged with the Companies and Intellectual Property Commission (CIPC). Matters still to be completed included the Postbank staff and operations and balance sheet will transfer from the Postbank division to the new entity after the banking license was obtained. The Bank Controlling Company structure and legislative conflict issue was being addressed.

The first key challenge was digital substitution where internet access in South Africa has grown significantly over the years. Smart phones drove internet access growth and currently made up 60% of active mobiles in South Africa. Users are able to access statements or bills by e-mail or apps, conduct purchases, payments and money transfers online. The biggest factor impacting the postal business is technological advancements.

In terms of SAPO revenue split versus global postal operators globally, postal operators are experiencing a decline in physical mail volumes, which was mainly attributed to digital substitution. Internet access was also driving e-commerce growth resulting in a growing demand for parcel and express delivery services. There was also an increasing need for economic financial inclusion which was driving a greater demand for financial services. In comparison to its African and International counterparts, SAPO was still heavily reliant on mail revenue. SAPO’s revenue generation strategy focused on deriving maximum revenue from existing products; developing new revenue sources by entering new markets segments; and developing customised solutions for key revenue partners.

Other challenges facing SAPO included revenue leakage from inadequate enforcement of legislated monopoly in the 0-1kg space, acquiring and maintaining appropriate skills, outdated IT infrastructure and damaged brand. Enabled by technology and/or market conditions, new players such as large retailers are now entering the courier sector. The organisation will be profitable by the 2018 year.

SAPO will grow its revenue by improving the value offering to its customers across existing key product lines and introducing new and innovative products. SAPO will grow its revenue by diversifying from traditional product lines towards newer offerings where there is greater growth potential i.e. digital services and parcels. Operating costs will be reduced by improving productivity and increasing the usage of technology within the operating environment. SAPO intends to increase its operating efficiencies on an ongoing basis without sacrificing its commitment to achieving service standards. SAPO will embark on a process of rebuilding its skill base and human resource capacity. The quality of workplaces will be improved and the availability of tools of trade will be increased to enable higher productivity levels across the organisation. SAPO will work to become the service delivery partner to government.

In terms of the financial plan, SAPO was targeting a net profit of R87 milion for the 2017/18 financial year. With current capital structure, SAPO will spend over R 2 billion in interest payments over the next six years. SAPO was targeting a 50:50 debt/equity ratio to ensure an appropriate capital structure. The current debt funding will be replaced with equity funding from government as a means of reducing the interest burden on SAPO. Capital injection for SAPO will be considered during the 2017 mid-term budget process. If SAPO relied only on debt funding, the company will be in a position to only settle its loans in the 2022 financial year. This meant that the loan guarantees would have to be rolled over at the end of the current 3-year loan period for another 3 year period. The total interest paid until the end of the period will be over R 2.2 billion or 60.6% of the R 3.7 billion loan capital amount that was borrowed.

A study conducted by SAPO showed that in rural areas, SAPO spent in excess of R180 million directly (excluding overheads) on loss-making Universal Service Obligation (USO) branches. SAPO will submit the report and subsidy funding request to the Department of Telecommunications and Postal Services (DTPS) for consideration for the 2018/19 Medium Term Expenditure Framework (MTEF) process. Key focus areas for the 2017/18 financial year included branch network and operational efficiency; Postbank license; SASSA grants readiness; re-launch a competitive courier business; investment to become the e-commerce hub of choice for Africa; and becoming government’s delivery partner of choice.

Discussion

Mr K Siwela (ANC) welcomed the presentations from SA Post Office and BBI. He asked what plans SAPO has put in place to ensure that the conveyer belt was fully operational since the service provider in this regard has disappeared. On the projected revenue increase from R3.1 billion to R3.5 billion, he asked what measures have been put in place to ensure that the projected revenue increase was realised. BBI will spend R92.7 million on capital expenditure, which was made up of 35% protection of revenue and 20% for essential upgrades and refurbishments. These two items looked like duplication and he asked what the difference between the two items was.

Mr C Mackenzie (DA) asked if the revenue from Postbank and the costs of USO were stripped, how they will be profitable. The entity was asking government for a subsidy to fund the USO and enforcing the reserve mail monopoly that they have. The reserve mail monopoly was given to SAPO so that they would rollout services universally. He asked if it was not little bit unfair to ask for both the reserve mail monopoly and the subsidy and should it not be one or the other. He wanted to know if nothing changes now in terms of subsidies, extra grants, etc, was SAPO still projected to be profitable by 2018/19. The document mentioned the maximising of containments, which presumably had to do with shipping, oversees mail by surface. This indicated that the post office has turned the corner both by reputation and operationally. There are complaints about the amount of time it takes for mail to reach its intended destination. He asked how they ensured quality of service to their customers. Mr Mackenzie also noted that in the strategic plan that one of their competitors was moving into SAPO space. It was also mentioned that SAPO intended linking up with these retail competitors and getting them to use the SAPO backbone. He asked why they would use the SAPO backbone if they have their own very efficient logistics of transport infrastructure. In terms of the 58 properties SAPO was looking into, he asked if they have an approximate value of what those properties might be worth. On page 50 of the BBI documentation, there was a jump from R66 million to R102 million on national revenue. This was quite a jump and he asked what the national revenue was and why they have focused focus on doubling revenue in that financial year.

Ms J Killian (ANC) said during the past 2 to 3 years there had been severe concerns about BBI’s ability to maintain its business operations and BBI did quite well with growing business efficiency. She congratulated SAPO for turning the corner on what seemed to be a hopeless case. She asked how many post office outlets are there because in their oversights visits they noted that some of the outlets are in very remote areas and it was not costing a lot because they are operating in corner shops. She wanted to know if they can indicate where the service obligation was actually placing a financial burden on, apart from the single employee. It was unfair that they must establish the impact of this service obligation on the post office because they could not allow them to generate income to cover the increase in service obligation. The new type of courier service in his report seemed to be similar in type as that of the South African Broadcasting Corporation (SABC). It had a public service component and it was also competing in an open market. She asked if that was SAPO’s intention and how far they were in the development of this courier service. She wanted to know if they will be ready before anybody else beat them in that particular market where they have launched that type of courier service. She asked if the R400 million invested in infrastructure was going to stabilise the system. It was interesting to compare what was happening to SAPO with Africa and with the international situation at large. Because when they look at page 8 of the report it’s interesting to see that the fourth industrial revolution has certainly affected the business operations of several companies and state institutions and the only thing they would want to see is how it was going to impact on the business models. SAPO should look into what people are using to communicate and move the mail service to an online business because it was growing internationally.

Ms M Shinn (DA) asked on the growth of income stream, which obviously needed private sector investment, such a proposal had been submitted to the Minister and what the nature of that proposal was. She asked what regulatory stumbling blocks that needed to be amended are in the way of private sector investment. On USO business, SAPO submitted a report to the Department on how to finance these in the medium term before the end of the year and she asked how much they have asked for. Every single page of the BBI report was marked as confidential and this should change because it was a public document. She referred to the strategic goals of BBI and said it was very thin on detail in terms of partnerships. She wanted to know how they are going to grow it compared to the emphasis on how to run a sound enterprise. There was not enough detail on what they are doing, who their partners are and where they think their strengths and weaknesses are. On capital procurement, BBI said they wanted their capital injections and she asked how far the discussions with various people are. They are they talking about private sector relationships in terms of their capital injections and she asked what kind of payback they expect and what kind of joint ownership do they get from this. BBI’s risk profile talked about the under capitalisation being a moderate risk and regulatory constraints in procurement and borrowing and marketing technology a certain risk. What are they doing about the regulatory constraints and what are these? What are they doing with market pressure, which they say is a common risk they have to face? Non-ICT state-owned companies was a likely risk to face and she asked why there was such a risk and what they are doing redress this. She asked what role BBI will play in SA Connect 2 since SA Connect 1 never happened. What role will they play in the rollout of ICT in rural areas?

Ms N Ndongeni (ANC) referred to slide 32 of the report and she asked what ‘other operating expenditure’ meant and why there had been such a huge increase from R581 million to R881 million. She asked for clarity with regard to IT costs which almost doubled in the 2017/18 financial year, what part of the IT infrastructure upgrade SAPO was busy with and how far that project was into completion.

The Chairperson asked when the STB installations are going to be installed. In terms of SAPO profit on monthly basis mentioned by the presenter, she asked to what extent this profit can be guaranteed given the frequent violent unrests in the townships. She wanted to know what the incentives are for the interns and in terms of the cyber security installation at Seshego High School; she wanted to know what the factors are that led to the identification of the school. On built employee capacity whether BBI would be able to sustain the skills capacity although they have a difficulty of raising funds. On the identification of SMMEs to be trained, she asked what the criteria were. She asked for clarity on the percentage of black women-owned entities and on opportunities for people living with disabilities.

Responses

Mr Barnes responded and said on the use of the conveyer belt, it was a surprise for him to find it underneath all boxes that were lying on top of it. Fortunately, the Universal Postal Union (UPU) paid most infrastructures initially and it was expected that they will start using it now. There was a payoff profile between using technology and fully employing people that they need to manage, but the growth in parcels business will justify the use of that facility. He has discovered a lot of spend historically on IT that was in anticipation of things happening rather than because things were actually needed. And so this was probably spent because there was something in it at some point in time, but this was not done anymore.

As far as the mail revenue was concerned, Mr Barnes said yes there was a decline in the letters business but there was an increase in the small parcels business. The mix of mail has changed and they are going to be held up quite a lot by the 9.3% increase in costs, which is above the budget inflation increase. Therefore, mail was pretty flat in terms of volumes, but the mix was changing. Letters are declining by 12% but small parcels are growing in access of 12% with an inflation increase that applied to mail and that was how they expected to make revenue targets for mail.

They did not necessarily say government must fund the USO, only that the USO business was different than a business managed for profit. It was a business which had to be managed to minimise costs and to increase efficiency. It was wrong to have business operating for profit mixing with the business operating for obligation. SAPO wanted a separate account for that business and if government did not want to allocate that capital it was no problem as long as they have separated the account for that obligation and reported it. For example, if there was one letter to deliver to one postal agency in a truck, it was obviously going to cost money. And more importantly, are the addresses that are happening in certain towns and the creation of new addresses and deliveries to blocks that are not typically street addresses where access was more difficult. It was about creating an infrastructure asset with the ultimate purpose to serve the South African citizens, but also creating a network, which will be of value in due course.

In terms of payoff profile between reserves monopoly areas and the subsidy, it was an outdated definition of reserves monopoly. The protection they had in place was protecting a diminishing and outdated business. There were situations where people have post boxes which were the preserve of the post office where people are using the post office as backbone, but masquerading as a separate entity or as a front. They wanted to expose those circumstances where they are collecting the wholesale of private bags using their (SAPO) postal system and taking the revenue and they have engaged ICASA on this matter.

In terms of the reserve areas, it was not an adequate comparison to USO obligations, in spite of the fact that the two might off set each other. There are no reserved areas in practice anymore in the postal domain. The aim was to establish a new mindset around USO obligations and reserve areas. The reserve areas would not help them but USO would create an asset.

There will be no profit if the USO interest was stripped out and will probably result in a R400 million loss for the year. And the predominant reason for that if critically analysing the commercial validity of economics was that they have a staff cost of only 50% above for where it should for the incumbent operations, but there was anticipation it would change. The reason they would make a profit in 3 years period was because of changes in revenue mix, not because the current operations are going to become profitable with the current cost structure.

On the question of international containers, he said it had just became a focus and apologised for not providing enough detail. The focus had been more on inward delivery than outward delivery. There was a problem with the ships having to fill containers. And whilst they (SAPO) are running a USO business, which was internal to South Africa, others are running USO businesses external to South Africa. Also one of the pleasures that e-commerce brought was an outward opportunity as much as it was an inward opportunity. They wanted to display South African goods on the internet and the rest of Africa was ahead in this thinking.

The value of properties identified so far for sale was R70 million and there are 58 properties.

The turnaround was not about management, but about people working in the post office and starting to believe they could do something bigger. People have started to believe that and started encouraging each other which was what was changing in the post office. In terms of competing, they needed to manage their business differently where they are competing and where they are providing postal services. When they are functional they are the lowest costs producer, and no one can replicate their infrastructure commercially. The business of postal services was not the core business of major retailers even though they (retailers) have to invest in trucks and logistics only because SAPO was competent in doing postal services.

On investment and network reliability Mr Barnes said the big investment in IT was just deferred projects. As management they have a different approach in terms of spending money because they first convinced themselves of the revenue case and then they spend the capital, rather than spending the capital and then check the revenue case. There was enough reluctance before there was a high confidence about spending.

Mr Barnes said he has not broached at all on private sector investment, because there was not a properly thought through business case to take the real partners. What was recognised in principle though was for them to understand they will require real partnership to built up their own base. Therefore, nothing has been approved. It was a mindset change that was going to be required and the solution will involve that.

As far as increases in other operating expenditure that it was related to the bank, where the banking system had to be upgraded, consulting fees were paid for the corporatisation process, which was funded directly from Treasury. Also the rollout of the Europad, Mastercard and Visa (EMV) compliant pin pads in the bank, and so forth. But all of those increases were to prepare the bank for last requirements and the risks systems that had to go into the bank.

Ms Puleng Kwele, CEO, BBI, said in terms of the refurbishments, they were growing the management system, data communication network, automatic switching network, which all had to do with the management of the network. BBI was also providing the background connectivity from the cable lane stations for the Square Kilometre Array (SKA) line. Therefore, specific diversity was needed and the infrastructure has reached a point where it needed to change. The first one was how they to optimise the network and to ensure that it can continue to be as efficient as it were. The bottom one was to retain specific routes hat had customers and traffic which was posing a challenge and needed investment to retain that specific revenue.

On the question of national revenue, customers have increased to 27, having splits three of the customers, with 24 under national revenue. Growth was coming from secondary towns and that was why SMMEs are connecting to them. For example, the Dr Kenneth Kaunda Municipality wifi was running through BBI. One of the only still outstanding under service areas was Umzinyathi Municipality. There was confidence that if the 24 customers were groomed, that was where growth will come from.

On confidentiality, she said documents are kept confidential because of the competitive market.

On strategic goals they provided, she said it was limited, but thy optimised the segmented rural network operators. There were content providers, which operate differently from infrastructure providers. NEOTEL provided the freight bogging, because as much as NEOTEL was a business focus provider, within South Africa it was also an infrastructure provider. The combination of the two meant that they played along the total continuity of the value chain.

In terms of the regulatory constraints, Ms Kwele said their risk register mentioned that they still had to comply with the Public Finance Management Act (PFMA) with regard to using their network for better planning, but the findings are that they are engaging the shareholder in terms of significance and the material framework they have. This was continuous engagement on this specific matter.

On the impact of the non-ICT state-owned companies, she said the Director-General had scheduled meetings with the Department of Transport and the Department of Public Enterprises to engage on the role these state-owned entities within this sector and the impact on the market structure, without restricting these companies. Post those engagements BBI had a meeting with ESKOM yesterday where they are engaging on developing the infrastructure because ICT’s are costly and electricity was costly.

The Chairperson thanked everyone and said questions that were not answered should be sent in writing to the Committee Secretary.

The meeting adjourned. 

 

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