South African Post Office progress and plans

NCOP Public Enterprises and Communication

07 June 2017
Chairperson: Ms E Prins (ANC)
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Meeting Summary

The South African Post Office (SAPO) presentation focused on the 2016/17 financial year progress, what went wrong, what went right, and how to go about fixing those wrongs in 2017/18. One of the things that went wrong in the previous year were the financials. SAPO spends approximately R70 million per month to subsidise the universal service obligations (USO) and public service mandate. In addition, the debt service costs are high at R301 million for the year – the anticipated equity injection from government is critical to reduce this figure. This put a strain on SAPO, as a result of this, the group net loss was R1.15 billion in 2016/17.

Some Members suggested that due to how SAPO had performed and its financials, SAPO should be privatised. SAPO replied that this would not be a good idea due to a number of factors such as its socio-economic and social mandate to provide services to people. Selling this entity would mean prices would increase and not everybody would then able to access the services it provides. Another factor was that SAPO owns a lot of infrastructure, plus the entity is slowly getting back on its feet.

Members wanted to know about the state of readiness of SAPO to take over the social grants contract. SAPO replied that they are currently busy with preparations to fully capacitate the entity. Some members were concerned about cyber-security if SAPO is to take over social grant payments. SAPO replied that they are currently working on measures to prevent such crime from happening.

One Member suggested that because a board member had close ties with the President, therefore the SAPO Board is ‘captured’.  In response, Mr Mark Barnes, SAPO CEO, said that he is not capable of being captured because he is not in SAPO for the money. He joined the entity because he wanted to render his services and help it. It is not an accurate thing to say the board is captured because he has been with the board for over year, and has seen how the board works. He said that they are very strict, diligent, involved and responsible. Therefore, he rejected the statement that the board is captured. .

Members asked about the status of the disciplinary steps taken against the former CEO and CFO. SAPO said that the response would be sent in writing to the Committee.

SAPO plans to improve its revenue through efficiency by introducing new technology, managing the staff well, and keeping contact with trade unions. In addition, SAPO is targeting a net profit of R87 million for 2017/18 with the measures it has put in place. Apart from performance management systems to improve revenue, SAPO has decided to launch and re-launch services, such as courier services, e-commerce, South Africa Social Security Agency (SASSA) social grants, selling 58 properties, and getting a banking licence in the current financial year.

On SASSA social grant payments, SAPO said that there were general statements that the Minister of Social Development is in support of SAPO taking over this function but there is no confirmation yet.

 

Meeting report

South African Postal Office (SAPO) progress and plans
Mr Mark Barnes, SAPO CEO, presented both the strengths and weaknesses of the South African Postal Office in the previous year:

Financial performance
Revenue was almost flat from the previous year, with a R96 million variance in line with 0.8% GDP growth in the economy. This is because SAPO spends approximately R70 million per month to subsidise the USO and public service mandate. Debt service costs are high at R301m for the year – the anticipated equity injection from Government is critical to reduce this figure. Interest on loans for a full year amounts to approx. R350m p.a; which is very high due to SAPO’s inappropriate capital structure. The consolidated balance available from the term loans is R687m which will only provide liquidity for at most another six months if current monthly loss levels continue. However, the total staff headcount was reduced from 20 781 to 18 729 as at 31 March 2017.

Post/Mail Business
Mail volumes declined by 12% in 2016, and they are expected to continue declining due to the shift from physical post. This will be substituted with parcels and e-commerce, which is growing at a rate of ± 20% per annum. International mail backlogs have been cleared at the Johannesburg International Mail Centre. Thus, SAPO has already been approached by the private sector to look at the possibility of SAPO being part of their logistics solutions. In addition, new retail branch area managers have been appointed, as SAPO is trying to do away with acting positions.

Human Capital Management
SAPO had an agreement with organised trade unions to resolve a number of legacy labour issues, and SAPO continues to engage with trade unions for labour stability. In addition, a voluntary separation programme was implemented resulting in 768 employees leaving the organisation during the year.

Postbank
The bank performed well financially in the previous year – the profit before tax was R249 million, exceeding the budget by 38%. It has a healthy balance sheet with total investments of R7.7 billion, and deposits from customers were sitting at R5 billion. In addition, the total number of accounts increased from 5 558 776 in 2016 to 5 731 135 in 2017. However, Postbank needs a banking licence to increase net interest from lending margins, and this could significantly increase return on assets to industry norms. Merging Postbank with a like-sized bank could dramatically improve the business case. The banking licence application will be submitted before July 2017.

The Minister of Telecommunications and Postal Services appoints Postbank board members, and has already done so in March 2017, and these board members were cleared as ‘fit and proper’ by the SARB prior to their appointment. Some key positions are not filled yet because they require a banking licence. In addition, Postbank is implementing a number of systems and processes required for the banking licence.

E-Commerce Business
SAPO generated approximately R174 million from parcels and R40 million revenue from e-Commerce related transactions in 2016, and intends to generate more revenue from parcels and e-Commerce by 2020 as this market is vastly growing. Parcels will be worth an estimated R10 billion in 2020, and SAPO expects to reach at least 10% of this market. The business plan for the creation of e-Commerce will be finalised by the end of June. This kind of service will require more resources, such as a new leader and a different management culture.

Customer Interface: Trend Analysis of E-mail Complaints Attended February – April 2017
Complaints from customers have decreased over the past few months.

Inter-Governmental Framework
SAPO plans to work with other government departments and agencies, and is currently pursuing several opportunities in terms of the framework, such as SASSA, UNISA, Telkom, Departments of Health, Communications, and Land Affairs, and the National Student Financial Aid Scheme.

SAPO Impact on Provinces
Postbank’s higher focus is on financial inclusion in all provinces, especially the rural and unbanked population. In addition, SAPO wants to improve the accessibility of motor vehicle licences renewal services to create convenience, including municipal account payments.

Regulatory/Compliance – Irregular Expenditure and Audit Findings
Irregular expenditure has decreased from 79.3% of spend in 2012 to 16.3% for 2016/17.

Discussion
The Chairperson said that she admired the effort put in by SAPO to make the entity work, and felt that there is a need to analyse the criticism received by SAPO to see how things can be improved.

Irregular expenditure is taken seriously by the Committee because most entities go down because of it; it is the little things that must be done right to make a success of an entity.

Mr O Sefako (ANC, North West) thanked SAPO for the presentation, and said that some of Members come from deep rural areas, where SAPO renders critical services to the people; it enables people to get their messages. He was pleased that SAPO has the ambition to provide SASSA grant payments, but he was concerned about SAPO’s capacity and security, because the world is fast and there is crime. He asked about the selection of SAPO board members.

Mr E Mlambo (ANC, Gauteng) congratulated SAPO for the work it has done thus far. Having listened to the presentation, he was feeling positive and encouraged by the positives mentioned in the presentation. However, he had difficulty with the courier services mentioned in the presentation. He asked for this to be unpacked because this service has not been rendered by SAPO in years. He made reference to Mr Sefako’s point about security, he too was concerned about cyber security. On the slides there was no mention of the advancement of state security with regards to cyber-crime.

Mr L Gaehler (UDM, Eastern Cape) said that SAPO spoke about funeral policies, what is the target market for this? Is it in operation? If not, when does SAPO plan to implement it? He noted that the interest on loans is high, will this drop when SAPO is a state bank? With regards to courier services, what are the plans for this? Will this service be outsourced? This is a huge service, how will this be done? Will more people be employed? He noted various services mentioned in the presentation, has SAPO thought about SMMEs?

Mr Gaehler said if SAPO gets the SASSA contract, this means that next year implementation would have to take place. What is the state of readiness and skills of SAPO? What are the plans? Is there a strategy in place? Will more people be employed? There is a high unemployment rate for youth. What is the strategy?

Mr J Julius (DA, Gauteng) said that in the 2016 APP there was a plan for disposal of properties. What was the impact of this? In that same vein, SAPO closed down a lot of branches due to non-payment of rent, what is the status quo now? Is the performance management system in place now? If there is one, the Committee would like a copy to see it too. He was pleased that the critical vacancies were now filled. With regards to revenue increase, two million post boxes remained unused in the past year, how does SAPO plan to increase this? Money was lost because of this. What is the status of the disciplinary steps taken against former executive members, the former CEO and CFO?

Mr Julius pointed out that in the past, SAPO promised to turn the tables in terms of profit. In a PMG report, it might be wrong, but it was supposed to be turned around to R1.2 billion net profit in 2018. He asked if SAPO made a loss due to a delay in funding. His view was that it is the job of the CEO and CFO to anticipate what will happen throughout the year. This is why people with the necessary skills to make profit are appointed.

He said that SAPO’s emphasis is on “we are getting there” whereas the sector is making a loss, and SAPO keeps making losses. He was looking at this in monetary value. Putting this as percentages like it was in the presentation will not help, the Committee needs to see and know the figure and value.

Mr Julius was not optimistic and convinced by the SAPO presentation, therefore he suggested that SAPO should be sold because of the current climate. In addition, there is ‘state capture’, and a current board member has very close ties with the President.

The Chairperson interjected that only relevant questions were to be asked in the meeting.

Mr Julius continued that the CEO and CFO should not be influenced by the board although they account to the board, because the board, in his view, is captured. He said that he did not need an answer for this, it was merely his opinion.

Mr Mlambo raised a point of order, and said that Mr Julius is aware of the rules of the Committee.

Mr Julius asked Mr Mlambo to quote the rule, because there is no rule.

The Chairperson pleaded that Members behave, and said that they are the politicians, SAPO people were there as officials. In addition, some things should be raised in different platforms.

Ms N Mokgosi (EFF, Northern Cape) also expressed gratitude for the presentation, and referred to page 10 of the presentation under March 2017, and asked how the Minister came up with names of board members. On page 13 on communications, how does information about Postbank reach people who have no access to media? This was asked because people from rural areas use Postbank.

The Chairperson suggested that SAPO shows them who the board comprises of.

She noted that at its previous meeting, SAPO had said that having SAPO branches in malls had proven to be expensive. Were the branches in malls closed down? If not, was profit made eventually?

With regards to profit, Mr Barnes replied that when he approached government to join SAPO, the forecast for the profit was R1.2 billion, and under his leadership they are forecasting more. He said that he did not buy the turnaround strategy that was presented for 2016/17. However, this was revised and a corporate plan was developed, which projected a loss of R1.2 billion, there was no correspondence with the initial figure that was presented.

He said that Mr Julius made a valid observation with regards to losses made by SAPO. One of the challenges faced by SAPO when he joined the entity was that there were good excuses as to why things were not done. There was a culture of delay, people wanted to do things in their own time, but that has changed now. Thus SAPO has decided to adopt the culture of motivating employees through incentivising them when they do well, thus they personally call staff members when they have performed well, to thank them, and at times they visit the branches.

Mr Barnes replied that he is not capable of being captured because he is not in SAPO for the money. He joined the entity because he wanted to render his services and help it. It is not an accurate thing to say the board is captured because Mr Barnes has been with the board for over year, and has seen how the board works. He said that they are very strict, diligent, involved and responsible. Therefore, he rejected the statement that the board is captured.

On the suggestion about selling SAPO, he requested the government to let him know if SAPO will be sold as he has people that would be interested in buying it. However, his suggestion to the Committee was that the entity should not be sold just yet because it has a socio-economic mandate, not just an economic mandate. If this were to be taken over by the private sector, prices would be increased and people would suffer because no institution renders services like SAPO with its socio-economic mandate in mind. Privatisation of institutions encourages inequality in SA. Healthcare and education are a good example of this. What he is in support of is public private partnerships. He would be delighted if this would happen for the e-commerce because they have the infrastructure, therefore they would be the ruling partner.

Progress made on the disciplinary action taken against the former CEO and CFO will be sent in writing to the Committee. Investigations are up to date and they are working with the Special Investigating Unit (SIU). The biggest case is the illegal Eco Point Office Park lease, which was an astonishingly irregular activity. SAPO intends to move back to their premises in Pretoria because they are not working well with the current landlord.

SAPO has four million post boxes, and half of them (1.9 million) have been in use. Two million of them are being paid for every month. The entity is decentralising the management hierarchies, for example, there is someone now who looks only at post boxes. He posed a question about whether post boxes are old fashioned. His response was that they are not old fashioned; there is still a future in post boxes.

SAPO is in negotiations with petrol stations to put mailboxes there, instead of putting them in malls because people do not want to go to malls at 09:00, they want to go to petrol stations; the entity wants to bring services to the people.

In addition, SAPO is in negotiations with the Department of Health to deliver medication, and fridges for storage will be needed. The Department of Health was told that this would not be a problem if SAPO gets the contract.

The copy of the performance management system will be sent to the Committee; it is operational.

In terms of properties, the sale of properties was stopped because property is the most valuable asset owned by SAPO. Looking at the past, SAPO properties have been sold at the wrong price. The entity does not believe in selling properties, because it owns infrastructure. Properties are a strategic asset for the entity. 58 properties have been identified and will be sold.

Everyone was surprised when SAPO stepped up for the SASSA job, and it was challenged by the Standing Committee on Public Accounts (SCOPA) to present to them. SCOPA reported in the parliamentary papers that they were satisfied that SAPO could do the job. The job was made to sound difficult, whereas it is not; this was done on purpose. When asked by SCOPA how many points of representation SAPO has, the debate was that SAPO had 2500 points of representation whereas Cash Paymaster Services (CPS) has 9000. Mr Barnes response was that CPS does not have any points of representation because CPS does not own even a tree. They subcontract some technologies used, and SAPO can do this too in some rural areas.  In addition, the current biometrics used are not ideal because they require fingerprints, and fingerprints wear out as people get older.

SAPO has done its homework, and has worked out every detail. For example it would take seven weeks to open 12 million new Postbank accounts. This is not complicated, it is just big numbers. He said that the Postbank is a highly regulated, systems-compliant environment that is efficient. This is a fully functional bank, thus the entity is comfortable that they can do this, but there needs to be a mandate quite soon because they do not want to wait until October and then SASSA says ‘alright do it’, so the entity will do this in June. 

In terms of SMMEs, the entity does see SMMEs as a target market.

On courier services, SAPO already has Speed Services at the moment, and it works well. The entity just needs to be trusted more. This will be implemented in six months, but he acknowledged that it will be difficult. For instance, Postnet uses SAPO for the final stages of delivery, thus it was not understood why SAPO was not rendering such services.

The interest costs are high because the money is borrowed too by SAPO.

Funeral policies are not offered yet by SAPO but it would like to consolidate with some of the products available already, SAPO would get there.

SAPO spent a lot of time on the cyber security issue, and it is a competitive advantage. SAPO has 50 million addresses, and has five times more branches than any bank in SA, and therefore they said that they should be the custodian of people’s data. Looking at companies like Amazon, they have data mining experts to predict purchasing behaviour. This will be part of SAPO’s system design and IT systems.

On the selection of Postbank board members, there is a joint agreement between the Ministers of Telecommunications and Postal Services and Finance; they have to agree, and this is governed by SARB. He volunteered to send the Committee a list of board member nominees.

On marketing channels in rural areas, this has not been thought of, but this will be dealt with soon.

Lease agreements do not just end overnight; therefore SAPO has to wait for lease agreements to expire. When Mr Barnes first joined SAPO, rent was overdue by six months, and the landlords regularly locked them out, and management could have done something about this because SAPO is not allowed to be locked out. However, such incidents have not happened thus far because they have moved from such premises. He said that it would be difficult to convince him to close a SAPO branch.

Mr Barnes thanked Members for their support. SAPO was worse off than he originally thought. He paid tribute to the staff that have to work in the worst of conditions in some of the offices. However, these conditions would improve

Mr Comfort Ngidi, Acting SAPO Board chairperson, thanked the Committee for the encouragement given to SAPO. He appealed to the Committee to emphasize the need for government support; SAPO needs support from government. The government used to support SAPO until 2011, and now SAPO would like to receive that financial subsidy once again. He spoke about the challenge of the ICASA licence. SAPO is also working towards the Postbank licence. There are so many things that a state bank can do and really we have had so many obtacles placed before us but we are optimistic of obtaining the licence by March or earlier.

In terms of the selection of board members, the Committee will be given the names of board members. The procedure for selection is aligned with the SAPO Act. He wanted to assure the Committee that being a board member is a huge responsibility, he too is a board member, and an attorney. He said that certain statutes regulate him; there are certain things he cannot do, such as engaging in unethical conduct. This means that there is no possibility of his being captured, as suggested earlier by Mr Julius. In addition, there is a process for choosing Postbank board members. They are chosen by the Ministers of Telecommunications and Finance, and they are submitted to SARB for fit and proper assessment. In essence, there is no possibility of capturing any board member.

Mr J Parkies, (ANC, Free State) wanted to propose a way forward for the Postbank. He said that it was common knowledge that the state is officially in recession, and whoever owes money to a bank will suffer. The point he wanted to make was that the sector cannot delay the licensing of Postbank any longer. He suggested the Committee should convene a meeting with the Ministers of Finance and Telecommunications and try to make sense of the politics of Postbank. The Postbank was fought for 15 years ago, to serve the people, and the Committee cannot be told about the application for a banking licence. There should be a different Act to regulate the Postbank; the Act used for commercial banks cannot regulate a state bank too. Quality banking services need to be delivered to the people soon. His humble request was that this must be finalised by the end of this quarter.

Mr Gaehler felt that his questions were not adequately answered. The government has a policy to transform the economy. Will the youth be employed when SAPO gets the SASSA contract? SAPO will definitely outsource when the courier service is implemented, will it consider SMMEs? SAPO is selling 58 properties, is there an asset register? Is it up to date? When disposing these properties, how will they be disposed? There are many people living in informal settlements, and millions of people with no houses.

Mr Julius said that he was almost sold by the response given about the board. He said that the Committee was worried about things happening in South Africa; they have fears, hence they are worth mentioning.

He urged the SAPO management to come up with proposals that will enable the Committee to support SAPO, because the Committee is part of the team, it wants to help; they are not merely there to ask questions.

He noted that there is a piece of land in his constituency that used to be a post office, and he has been complaining about it for the past two years. The building is billed unnecessary municipal rates; the building should be disposed of and land can be developed by the municipality

He said that Department of Social Development officials have said they are willing to hand over the payment of social grants to SAPO. However, the critical part is if the Minister of Social Development gave SAPO an indication of handing over the social grants?

Mr Sefako asked how industrial strike action will be prevented from recurring, because this is tarnishing SAPO’s name.

Mr Mlambo raised vehicle licence registrations, he was shocked to learn that SAPO in the Western Cape does not have that service. Is the rollout in the Gauteng Province? What about the other provinces?

Mr Barnes replied that the application for licensing Postbank will be submitted to SARB soon; he also supports the idea of finalising Postbank as soon as possible.

Mr Barnes said SAPO vowed to employ the youth when they get the SASSA contract. SAPO is already currently understaffed by 40%. In addition, his strategy is on increasing revenue, not cutting costs. In essence SAPO is committed to decreasing unemployment. His strategy is to increase revenue, not to cut costs.

In terms of property, SAPO will sell 58 properties, and this might sound like a big number but the market value is only R70 million. If SAPO gets an instruction from government to dispose of these properties for the good of the public, then that will happen.

SAPO cannot be judged on making profit, it could make a profit tomorrow and cut costs but its mandate is to meet its economic and social mandate.

An asset register is in existence, and was re-evaluated for the first time this year. The SAPO building that Mr Julius referred to will be dealt with.

He said that he is new to the idea of labour unions. He first encountered them when he started working for SAPO, and he felt that the unions had valid demands. Thus, SAPO and the unions have a working relationship to keep employees and SAPO happy.

Mr Ngidi replied that he, together with Mr Barnes, are doing things that are in the best interest of SAPO to benefit SAPO. They are committed to making the organisation work, and will not cut salaries of employees. Thus they communicate with employees to make the organisation work.

With regards to SASSA, SAPO hopes that people will see the value of handing over social grants to them. The entity is currently engaging with relevant stakeholders to make this a reality.

Mr Barnes replied that in terms of the Minister of Social Development’s approval, there were general statements that she is in support of SAPO but there is no confirmation.

Mr Julius suggested that one of the Committee members can go to the Social Development debate to raise this matter.

The Chairperson thanked SAPO for the engagement.

The meeting was adjourned.
 

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