SITA, BBI, SAPO, Sentech, .ZADNA 2016/17 Annual Report

Meeting report

State Information Technology Agency (SITA)
Mr Zukile Nomvete, Chairman of SITA, said SITA had embarked on a new business model. Two SIU investigations were conducted in areas of HR and procurement and the recommendations which arose were resolutely followed. This had resulted in threats on the lives of the executive team and was a stressful time for all concerned. The elephant in the room was that SITA had not had a tariff increase since 2007 and SITA was trying to address that and was looking to the Committee to assist in this regard.

Dr Setumo Mohapi, Chief Executive Officer, spoke to the performance, financial and audit review.
SITA had achieved 76% of its performance targets. In the previous year it had recorded a loss of R207.9m and for 2016/17 financial year had a surplus of R245m. SITA had received an unqualified audit opinion. SITA had conducted a comprehensive investigation into alleged fraudulent activities within the HR department which was concluded. The individuals involved were either dismissed or resigned, including the executive head of Human Capital Management. SITA had renegotiated an existing Microsoft contract which would result in significant savings of over R1.3 billion over the next three years across government departments.

Mr Andre Pretorius, standing in for the Chief Financial Officer, said revenue was R5.6b. SITA had a history of cash flow challenges. SITA was not generating enough cash from operations to fund capital expenditure. Cash reserves were depleted to fund urgent capital expenditure procurement and therefore SITA was working on collecting debt timeously.

Dr Mohapi said SITA had incurred irregular expenditure and fruitless and wasteful expenditure amounting to R450 million and R0.4 million respectively and had detected this themselves and informed the auditors. Management had initiated a number of formal investigations relating to irregular expenditure and fruitless and wasteful expenditure. The majority of these cases were still under investigation at year end and as a result no disciplinary cases were concluded during the year.
Appropriate action would be taken as soon as the investigations were finalised. People were now afraid to maliciously enter into irregular contracts. Consequence management was being implemented and people were leaving the organisation. In the previous week someone had been charged in Durban.

Discussion
Mr C Mackenzie (DA) said the presentation document was a disaster. He complimented Dr Mohapi as being capable and that SITA was showing a positive trend. A deficit was changed into a surplus and consequence management was implemented. On the threats made to the lives of executives, what plans had been made regarding the security of executives. Why was SITA not allowed to increase tariffs? Was there any training and support given to schools which had received donations of computer hardware? Was the revenue shortfall of R607m for one client or was it spread over many clients?

Ms J Kilian (ANC) asked for clarification on the tariff increase issue and on the AG’s comments on those investigated for possible fraud. Where people had resigned by signing a mutual separation agreement, were they guilty of fraud and were they being charged? If not, why was it necessary to sign this agreement? She asked if the forensic investigation had been concluded and if so, wanted the details on the damage done to SITA’s reputation. What then had led to business picking up, was it their system operations?

Ms N Ndongeni (ANC) asked for a list of the schools which had received computer equipment.

The Chairperson wanted a breakdown of the transformation figures in relation to the schools which had been supplied, especially of the approximately 600 schools that were not in rural areas. She asked which questions, arising out of the customer survey, were the most common that needed to be attended to.

Mr Nomvete said the death threats had been reported to state agencies and the threats had been made to two board directors as well.

There was no theft involved, SITA entered into a mutual separation agreement.

Dr Mohapi said that tariffs by law had to be approved by the Minister and the Minister of Finance and the Ministers of departments. Traditionally IT heads of department had never supported an increase, but they were now supporting an increase. SITA had been told to solve the service delivery problems before asking for an increase. Many departments were satisfied with SITA’s service and some had incorporated its entre IT systems with SITA. SITA should have enough letters of support by the following year.

SITA would supply the list of schools it had provided with computer hardware.

SITA had a new Corporate Social Responsibility programme strategy. The donations of hardware to schools was being used as software development academies producing certificated skills where the learners could be absorbed by SITA or do further studies in the field.

A third of the shortfall was of service revenue from tariffs and two thirds from projects of departments that were not realised.

The mutual separation agreement meant staff left immediately and were paid for the month. There were no golden handshakes. The agreement was done on advice from SITA’s legal advisors

SITA had thought the forensic investigations would be done but the Supply Chain Management (SCM) forensic was big and had tentacles in lots of different areas

The brand had been damaged and the systems they had were old but the eGovernment programme was successful in turning perceptions around. SITA had modernised systems into cloud computing which was bringing in new clients and SITA was clarifying its value proposition. SITA was implementing SMART demand and supply management from transaction based propositions.

most complaints arising from the CSI were on turnaround times for procurement.

SITA would supply the breakdown of the 36 schools.

Broadband Infraco (BBI)
Mr Mandla Ngcobo, Chairperson of the Board, said he had started his stint with an entity that had a lack of controls, but there had been no SIU investigations. There was an issue of whether it was a going concern, but BBI had managed to stay afloat. He said BBI wanted to convert its debt into equity.

Ms Puleng Kwele, CEO, said customers had increased from one to 30. BBI had remained competitive on main routes and had covered costs on non- main routes and 19 of the customers were in secondary towns. BBI had achieved 15 of its 18 Annual Performance Plan (APP) targets. It had procured transmission equipment from Original Equipment Manufacturers but in future would work to install the equipment themselves. BBI had not achieved its revenue target, but this was mitigated by lower costs of sales. Earnings Before Interest, Tax, Depreciation and Amortisation (EBIDTA) had been positive for two years and operational costs were down by R22m. Capital expenditure amounted to R70m.
 
Mr Ian Van Niekerk, Chief Financial Officer, said the operational loss of R127m was due to lower revenue. Cost of sales was also lower by 14% led by the renegotiation of a contract with a major supplier. The billing to revenue cycle was getting longer, assets had increased by R70m and 420km of optic fibre was installed. BBI was trying to reclassify shareholder’s loans into equity.

Ms Kwele said audits were done before any tender was awarded. Some expenditure was reversed after it had been identified as irregular and there had been no irregular expenditure.

Discussion
Mr Mackenzie asked for comment on BBI’s future.

The Chairperson noted that the presentation was not saying anything on what it was doing to mitigate the fact that targets were not achieved. Why were people with disabilities not catered for? On the decrease in cash, she asked what guarantees there were for the sustainability of BBI.

Ms Kwele said it was important for the future outlook of BBI that legislation be streamlined and that there be no duplication of services. BBI provided the infrastructure and Sentech did the signal distribution while SA Connect still had to be implemented.

Regarding mitigation measures, BBI would do so going forward and would continue to drive revenue and strengthen the balance sheet to enable the sourcing of funds to invest in the networks.

On economic transformation, one of its strategies was that OEM installers needed to train local installers to gain accreditation as installers.

The People with Disabilities programme was a challenge.

Mr Van Niekerk said BBI was managing its cash very carefully and was getting support from the Department to convert debt to equity.

Mr Mackenzie asked whether BBI was on track to making a bigger profit (or loss) for the current year.

Ms Kwele said BBI were confident of minimising the loss, but wanted to make a profit.

South African Post Office (SAPO)
Mr Dumisa Ngidi, Acting Board Chairperson of SAPO, said SAPO had regularised 6 000 contract workers into permanent workers. SAPO had reduced audit qualification items from 11 to four.
SAPO had submitted a bank licence application and questioned whether it was correct that a new bank with 80% Australian shareholders was given a licence, as he felt that Post Bank should have been prioritised. He said that if SAPO paid social grants it would help stabilise it. The capitalisation of SAPO needed to be reviewed, because it was financed largely by commercial banks

Mr Mark Barnes CEO, said revenue was down 4.1% but expenditure was also down 3.8%.  SAPO was solvent, with a net asset value of R1b, but liquidity was a different matter. There had been a 12% increase in mail delivery. There were qualified audit opinions on property, plant and equipment; contingencies; irregular expenditure; and international revenue. The Post Bank controlling structure still needed to be finalised. He anticipated a clean audit in the next financial year. The key issue was revenue. The Post Office had not spent money on revenue generating activities and were looking at developing areas where time was not important but where volume was predictable. It was important that government recognise that providing guarantees to entities was only underwriting the banks and not the entities and so equity capital was needed. Only R54m was spent by SAPO on capital expenditure. Physical volumes had increased by 400% but was not profitable. There were lots of foreign partners who wanted to partner with the Post Office in eCommerce ventures. The Post Office was not comparable to them, so partnerships were the only path the Post Office could follow. Post Bank had increased deposits by 4% to R5b. The Post Office was a balancing act because there were also a developmental mandate and it had to meet universal service obligations.

Discussion
Mr Mackenzie said he had been looking for evidence of the innovation that had been part of Mr Barnes’ plans for SAPO. SAPO had a postal monopoly so why not capitalise on this fact. He had visited some Post Office agencies and was shocked at their state. The Post Office was lacking innovation and continued to make losses and would not get those customers back that had left it. What was SAPO’s plans regarding innovation without government intervention. The Courier Freight Group (CFG) went into liquidation yet SAPO bought it from the liquidators. Post Office volumes had increased by 4%, did the staff also increase and would this additional cost create further losses? Why could ID documents not be done at the Post Office the way FNB did it. He wanted the background to the Commercial Workers Union (CWU) going on strike. Were there facts to prove the allegation on the prioritisation of the new Australian owned bank over the Post Bank? He wanted an update on the SIU investigation of fraud concerning the Eco Point lease.

Ms Ndongeni asked if SAPO had plans to move from their current premises. On an oversight visit she had found broken conveyor belts which had been paid for but were not fixed.
How many employees did SAPO have? Was the Post Office ready, in terms of infrastructure and IT, to deliver SA Social Security Agency (SASSA) grants? What caused the delay in the receipt of funds in July that was scheduled to be delivered in May?

The Chairperson said the key points of the AG report was the issue of the proximity of branches and the underutilisation of space in branches. She asked about rentals as a cost driver for underperforming or loss-making branches and also said the Move Validation Letter (MVL) machines were not fully operational. As the country was getting closer to the 2019 elections, had the Post Office considered focusing management as a contingency mitigation plan because the Post Office might be affected. What was the situation regarding SASSA given the departure of Mr Magwaza from SASSA? How was the delivery of mail to informal settlements affected if addresses were not registered with the municipality?

Mr Barnes said that funding for specific projects were ring fenced and did not come into the income statement.
 
He said it was difficult to give information on innovation in public forums. SAPO were in negotiations on ventures but none of these deals were done yet because money was spent according to a hierarchy of obligations.
 
There was no such thing as a postal monopoly anywhere in the world.

Many SAPO buildings were in a shocking physical state and that to fix all branches to safety compliance standard would cost R400m.

He confirmed that customers would not come back to the Post Office in its old form, but would come back if the Post Office had new offerings. SAPO was aiming for postal deliveries for their corporate clients to be less frequent but more predictable. The future of the Post Office did not lie in profitable mail.
 
The Post Office had not had subsidies for the past seven years and compliance with its mandate meant it would make a loss. If it could not get to change its business and move into banking and ecommerce, then it would not make a profit because it must then be seen as a part of government with a social mandate. However, the Post Office had the infrastructure and the Post Bank had idle capital which was trapped. SAPO wanted to deploy this idle capital but were currently hamstrung.

He said CFG was never liquidated. The Post Office did not do the liquidation to protect the 700 jobs and CFG had been transferred to the Post Office.

On the CWU strike, press announcements indicated little criticism of the Post Office, it was more against the sources and application of capital in the country. The strike was monitored on an hourly basis and there had only been one reported case of intimidation. Only 970 people were not at work on any one day out of a staff complement of 19 000 people.

He said it was not a rumour that the new licence was issued to the new bank which was 90% controlled by an Australian bank. Post Bank could match and beat their offering.
 
The Post Office was constantly in legal battles with Eco Point and Eco Point continued to defer matters. The worst case was to move to new premises and pay rent for two places in addition the Post Office could not sublet Eco Point. SAPO had called for the courts to move the case up the roll.

The conveyor belts were given to SAPO for free. They were not being used because it had to be repaired.

The total staff complement was 18 729 inclusive of part time employees.

SAPO had already costed IT refurbishment and its IT capability had been scrutinised. Banks had serious compliance requirements and the Post Bank was fully compliant and was capable of upgrading its capacity. SAPO had mapped its capability to do the social grant payments and were ready to do so, however there had been no communications with SASSA since the Standing Committee on Public Accounts (SCOPA) meeting and even then, they had been given no chance to speak. SAPO had tabled a comprehensive solution and were waiting respectfully to hear from SASSA. If the Post Office was offered scraps by SASSA, it would not accept it.

He said the branch network footprint was defined by population density and the law, not distance and this needed to be revisited.

The regulatory environment needed to be revised to allow the Post Office to operate in the modern technical world.

He said the challenge was to invest in the Post Office’s infrastructure and develop assets. Investment by the private sector created a liability and dependency.

On the MVL’s, he said the number of machines and tills was not a decision of the Post Office, it was from the Department.

On the capital structure, SAPO had tabled alternative capital structures and were engaging in discussions on issuing a Post Office bond. The challenge was that the Post Office also needed money to spend, not just to settle liabilities.

On the issue of being a monopoly, Mr Ngidi said the Post Office had license rights to all parcels in the 0 to 1kg range but no one was enforcing this.

On the Eco Point lease, he said the legal processes needed to be followed because the public protector had made a determination.

Regarding loan income, SAPO had received the money in July instead of April because negotiations had to be completed regarding guarantee approvals.

On SASSA, the previous SASSA CEO had appointed the Post Office in a letter of appointment and in SAPO’s view the letter was still valid. SASSA had decided to submit tenders and had done due diligence which had been checked by the CSIR and SAPO was waiting for SASSA to take a decision.

On the banking license, he said it was reported that the Commonwealth bank of Australia was supported by Mr Motsepe.

Mr Mackenzie said Mr Ngidi had called the Post Bank a state bank. Was that the role it saw for the Post Bank? How many SAPO people were striking? Were there any plans to provide ID documents via the Post Office? He expressed his concern that he expected the Post Office to once again post losses. Regarding SAPO ‘s trust centre, a constituent had constant complaints on not receiving items from the UK.

Mr Barnes said Post Bank was not a state bank and it had nothing to do with the President.

He said mail volume had grown by 400%, not 4%, but SAPO had not spent money on increasing staff, but had doubled shifts.

The number of people on strike was in the hundreds and in terms of branches was in the tens.

He had met with Post Net regarding the Post Office’s licence for parcels between 0 and 1 kg, but Post Net had ignored this limitation on its operations. What could the Post Office do to enforce its right, yet it was paying a license fee of R16m p.a.

He had engaged with the Department of Home Affairs regarding the issuing of IDs. There was no obstacle to it taking place.

He was disappointed in the projected losses, but one needed to note the diverse mandates of the Post Office.

The trust centre was not about mail delivery, it was an authenticated, audited capability that was trusted in law to issue digital certificates. He was surprised that the client was not getting a response and would leave his contact details.

Mr Mackenzie said the diverse mandates of the Post Office should be reflected in the APP

The Chairperson said the KPI headings in the presentation was deceiving. On SASSA, she she was looking forward to the time when the Post Office was approved as the distributor of social grants

Sentech
Mr Magatho Mello, Chairperson, said Sentech had a difficult year, but was also better than expected. Sentech had had challenges with some of the community broadcasters and with the prevailing economic conditions. He was expecting to increase profitability going forward. He was concerned that Sentech’s big customers were going through a difficult time economically and there were challenges regarding the opportunities for growth for Sentech which was trying to manage costs and were implementing a plan to expand their operations into the continent.

Mr Mlamli Booi, CEO, said Sentech had a clean audit for the past five years and had grown even in difficult economic conditions. It had met all its strategic objectives. The challenges were: sluggish economic growth and weak R/$ exchange rate; a shortfall in the funding of dual illumination which impacted profitability for the year; and a Level 4 B-BBEE Rating; community broadcasters and some commercial broadcasters continued to face challenges of sustainability and as a result Sentech has raised a doubtful debts provision to R28 million for the year; and a single major customer of the company started to experience cash flow challenges towards the end of the financial year and this has continued in the post reporting period.

Mr Siphamandla Mthethwa, CFO, said the Rand/dollar exchange rate, which was a key cost driver, had weakened. There was a challenge in the funding shortfall for dual illumination and they had doubled debtors provision for the debt of community broadcasters. The balance sheet was strong with no external debt.

Ms Jacqueline Huntley, member of the Audit and Risk Committee, spoke to the audit findings which were general information technology controls weaknesses; and financial internal controls weaknesses; non-compliance and consequence management. She also spoke to the root causes of these issues and management’s responses to them.

Discussion
Mr Mackenzie asked if control measures were implemented regarding community broadcasters or did the Department deal with them. What was the reason for the decrease in the gross profit margins?

Ms Kilian asked what mitigating steps were taken to secure funding. Regarding the lack of a dynamic workforce, to what then did Sentech ascribe its successful performance? How did Sentech intend to mitigate these risks?

Ms M Shinn (DA) asked what the challenges were regarding Sentech’s rating codes for B-BBEEE ratings. She said the presentation was silent on the satellite RFP. Could more details be provided?
What buy- in was there from other government departments?

The Chairperson asked how the audit findings and interventions were managed.

Regarding management challenges, Mr Mello ascribed it to the influence of the rebuilding of skills and the fact that the board took time to understand the business.

The second biggest cost was satellite costs. It was a concern that Sentech could only grow if clients or industry was growing, so Sentech had to look for other revenue streams. The diversification of the business was challenging.

Mr Booi said Sentech had a debt management procedure for community broadcasters and their debts.

He said the strategy from the DTPS was to develop a national satellite in coordination with other government departments.

Mr Mthethwa said a lot was spent on catch up maintenance.

He said Sentech had not gone to the market looking for a satellite.

A clean audit started with the leadership, where noncompliance was not tolerated and which ensured that the right people were employed.

Mr Booi said the current tender for a business plan and market study for the satellite was a work in progress.  

Ms Shinn asked who the successful bidder was.

Mr Booi said it was Solario Technologies.

The Chairperson asked if there had been any incident regarding risk management occurred.

Mr Booi said there was a cycle of refreshing technology every four to five years in planned and preventative maintenance.

Mr Mello said Sentech still received a lot of revenue through classical ways. This was also a risk because of the global shift to online delivery of content and this was where diversification of revenue streams came into play.

Mr Mackenzie asked if the rationalisation of Sentech and BBI would positively assist to deliver in content with regard to fibre and if so, how would it impact on the acquisition of a satellite.

Mr Booi said a relationship was being planned which would be an advantage to Sentech, so all sites could be linked by fibre and satellites would be used as a backup and, in this way, reduce satellite costs. Sentech’s licence was to work with the end user while BBI acted as a wholesaler to assist with connectivity especially for government institutions like schools and hospitals. 

The meeting was adjourned