Adjustments Appropriation Bill: DTPS & SA Post Office recapitalisation: hearing

Standing Committee on Appropriations

28 November 2017
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Department of Telecommunications and Postal Services (DTPS) presented on its Second Quarter performance and updated the Committee on its projects especially the much anticipated SA Connect Broadband Project intended to improve telecommunications and internet connectivity.
DTPS supported SAPO’s funding application through the 2017 budget adjustment process. Engagements have started with Treasury which has initially indicated that the whole R3.7 billion should be used to settle debts with banks. SAPO has cash flow problems which require investment in key initiatives that would assist it to kick start the turnaround. The proposal is that part of this R3.7 billion be invested in worthwhile commercial investments, otherwise SAPO will require other sources of funding for its cash flow requirements. SAPO has been beset by historical labour instability, but all outstanding debts to labour have been settled as part of the loans from the banks last year. DTPS has assisted SAPO in the appointment of three senior executives, CEO, CFO and COO, as well as the appointment of the board with the hope that leadership stabilisation will help in the turnaround.

The Committee was unhappy that the long awaited SA Connect Broadband Project had stalled. They questioned the capacity of the staff to undertake the project and threatened to exercise consequence management on the DG who was not present at the meeting. They noted the failure by DTPS to draw up an acceleration plan to kick start the process as had been directed at its previous meeting. The Committee resolved to elevate the matter of the project to the Minister so that serious measures could be taken to get the project off the ground. Members were not pleased that DTPS had only spent 12% of the money budgeted for goods and services. Underspending was just like unauthorised, irregular, fruitless and wasteful expenditure as it compromised service delivery to the people.

The South African Post Office (SAPO) presented its second quarter report, funding requirements as well as its business plan. The Post Office posted a loss of R723 million despite earning revenue of R2.3 billion. Its core business of mail delivery was declining at a rate of 2% per year. However, Postbank was a profitable and highly capitalised entity of the Post Office group. The Post Office called for more investment in for it to be viable. It was in negotiations with National Treasury and the banks about the R3.7 billion recapitalisation. Of particular interest was the partnership between the Post Office and SASSA in the payment of social grants.

Members were of the opinion that the Post Office was asking for too much money to pay social grants and needed to revise its figures. The Post Office was asked provide the Committee with a breakdown of the money required to ensure that a system was in place that would not disadvantage the recipients of social grants.

SAPO explained that whatever money goes into SAPO, stays within government. The money would not go into the private sector. The state will earn interest on all monies which belong to the state. SAPO will provide a limited number of free ATM withdrawals which is a high percentage of the grant. The state has got to create an asset by building infrastructure. SAPO would build the system on behalf of the state to replace the state’s dependency on an outside service provider. They will become assets of the state. The way SAPO had built up the cost structure was that the money used for the system would come from SAPO and not Treasury. SAPO was an organ of state and would subject the cost structure to the inspection of the Auditor-General. All the money would stay in fiscus as they build their own capacity and it would be a transparent system. The payment of social grants was not a private sector business but a government service. They had explained to Treasury the costings. If SAPO was to replicate the services being offered by the private sector, there were costs such as buying armoured vehicles, cash dispensing machines, computer and banking software. The bottom line is that government would be building its own house instead of paying rent.

Meeting report

The Chairperson noted the Minister had sent an apology and she noted the absence of National Treasury. The Committee would be briefed by DTPS [one of its entity, South African Post Office, would receive R3.7 billion as recapitalisation in the 2017 Adjustments Appropriation Bill]. In the middle of each year, the adjustment process provides an opportunity to make permissible revisions to the main budget in response to changes that have affected the planned government spending. This is part of South Africa’s open and accountable budget process. She asked for a free, open, robust and fruitful engagement. There was a need to ensure that the money spent on the meeting was well spent.

Department of Telecommunications and Postal Services briefing
Ms Joy Masemola, Chief Financial Officer, guided the meeting through the Second Quarter financial performance of DTPS. The overall performance for DTPS in terms of expenditure was 45.4%. For Administration, there was overspending of R5.4 million due to cost of living adjustments and the purchase of a Microsoft software licence which cost more than was budgeted for. There was overspending of R1.3 million in the ICT International Affairs programme because of an exchange rate variance when paying for international membership fees. In the Policy Research and Capacity Development programme, there was a saving of R8.6 million because consultants were not contracted as the required work was done internally by staff. There was also a saving in the ICT Enterprise Development and SOE Oversight programme of R2 million because consultants were not engaged. In the Infrastructure Support programme there was a saving of R213.5 million because of the SA Connect project where money was not spent and the cost of cyber security was not paid for in the second quarter. The total budget was R1.6 billion and the amount spent at the end of the second quarter was R732.6 billion.

On expenditure per economic classification, the budget line for compensation of employees had savings because two positions were not filled, DDG Policy and DDG International Affairs. For goods and services, the expenditure level was 12% mainly due to the SA-Connect project delays. On transfers and subsidies, there was overspending of R1.3 million mainly because of leave gratuities, as well as transfers to international organisations which had exchange rate financial implications. On the payment of financial assets, there was overspending of R22 000. There was overspending of 68% on capital assets due to purchasing of new computers for DTPS and the delay in the purchase of a vehicle for the executive authority. On transfers, the level of spending reached 68% at the end of the second quarter.

Performance
Acting Director General, Mr Omega Shelembe, presented the information on the performance of the programmes in DTPS. It had a total of 23 targets to achieve in the second quarter of which 20 were achieved which translated into an 87% success rate.

SAPO Turnaround
As part of the DTPS mandate, it oversees and monitors the performance and supports the turnaround initiative of the South African Post Office (SAPO). This turnaround strategy is premised on several focus areas: delivery of the social mandate; cost reduction and promotion of efficient utilisation of resources, and revenue growth and diversification.
• The main challenge of the social mandate is that the postal outlets that are in the remote and rural areas that are economically non-viable are lacking financial support to deliver the universal service obligation.
• The second challenge is that there is inadequate regulatory enforcement leading to encroachment in the reserved postal market.
• The challenges facing cost reduction are the high operational costs such as labour which accounts for 60% of the total costs.
• The challenge to growth is the continued decline of mail volumes and the loss of customers that was occasioned by the last prolonged postal strike.

The mitigation measures that have been undertaken include a review of the postal policy, implementation of cost reduction measures, approval of the sale of non-core assets, enforcement of regulatory compliance, measures to expand the postal services role in e-commerce and efforts to secure government business such social grants payments facilitation.

The Post Office balance sheet is reliant on the debt funding worth R3.7 billion. DTPS is supporting SAPO’s funding applications through the 2017 budget adjustment process, the 2018 MTEF process, as well as securing funding through commercial banks. Support has also been provided in securing government guarantees. Engagements have started with Treasury which has initially indicated that the whole R3.7 billion should be used to settle debts with banks. SAPO has cash flow problems which require investment in key initiatives that would assist it to kick start the turnaround. The proposal is that part of this R3.7 billion be invested in worthwhile commercial investments, otherwise SAPO will require other sources of funding for its cash flow requirements. SAPO has been beset by historical labour instability, but all outstanding debts to labour have been settled as part of the loans from the banks last year. DTPS has assisted SAPO in the appointment of three senior executives, CEO, CFO and COO, as well as the appointment of the board with the hope that leadership stabilisation will help in the turnaround.

Discussion
Mr A McLoughlin (DA) asked why DTPS needed 11 people to come to Parliament to give the presentation as it costs money and only 3 people spoke. In the presentation there was a disconnect. On policy research and capacity development, it reported 36.3% of the budget had been spent, but in the presentation on department performance it was reported that 100% of the targets had been achieved. He wondered how that information could be reconciled. He said the same applied to ICT enterprise and development and SOE oversight where the information states that 100% of the targets had been achieved and yet only 53% of the money allocated had been spent. He asked for clarification. On infrastructure support, he asked if DTPS would be able to spend all the money allocated. He expressed concern that only 12% had been spent on goods and services and how 88% could be spent in the remaining two quarters. On the payment of financial assets where R22 000 was overspent there was no budget. Was that unbudgeted, unauthorised expenditure? On the broadband connectivity plan phase 1, it was reported that the main challenge was that Treasury had not transferred the funds. If that was the case, and that was the reason for the delay of the project, then it was concerning. He asked what follow up made to see whether Treasury was waiting on DTPS to do something.

Ms D Senokoanyane (ANC) was concerned by the underspending on goods and services as most departments tend to overspend on this. She requested a breakdown of this budget item. On migration of digital signals, the entire budget had been spent at the end of the second quarter and she asked if this was a once off payment.

Ms M Manana (ANC) asked if DTPS had budgeted for consultants because there was a directive that there was no need to use consultants any longer. On the compensation of employees, two positions that were not filled and she asked for an update. On transfers and subsidies, she asked if DTPS was exercising oversight to ensure that funds were being utilised for the intended purpose.

Ms M Shinn (DA) asked if the second quarter target of connecting 800 sites under the broadband connectivity plan phase 1 had been achieved out of the projected number of 2 700. She asked  if it would be possible to connect all 2700 sites by the end of the financial year. On the R3.7 billion bailout that was initially meant to settle debts owed to banks, she requested further information on plans to invest the funds. Would the interest generated on those investments be more than the interest needed to pay the banks on the loans? She asked for specific plans being pursued to secure more income for SAPO. She expressed concern that while DTPS wanted to secure more business for SAPO from the government, other departments have to go through the PFMA. She asked if this process would go through the PFMA and if it would be a competitive process.

Mr N Gcwabaza (ANC) said it was important to make the point that irregular, wasteful and fruitless expenditure, as well as under-expenditure and over-expenditure can no longer be tolerated, not just by the Committee but by Parliament. The country was in a very difficult fiscal and economic environment and what was going to decisively shift the country out of this position was efficient and productive expenditure by departments and their entities. The Committee had the right to recommend to Parliament to take measures against any department that continued to spend money in ways that were not authorised. Under-spending and over-spending jeopardise service delivery to the public as money has become scarce.

He said Parliament was going to watch closely how departments promote SMEs and cooperatives as a way of getting into the process of inclusive economic growth so that all the people benefit from the economy. Collaboration between departments and entities, on the one hand, and SMEs and cooperatives, on the other hand, must be clean, free of corruption, transparent and fair. One of the reasons that the economy found itself in this position is because the economy is concentrated in the hands of a few and there was a need to spread it out to the majority. The legally stipulated 30-day period for the payment of goods and services has to be strictly adhered to because if that is not done, the small scale enterprises and cooperatives will fold up. Public representatives and servants who continue to do business with government would no longer be tolerated because there was a conflict of interest. There were blank spaces on the payment of financial assets which implies that there was no budget. The R22 000 needed to be clarified. Two critical posts were vacant and when were they going to be filled. Non-filling of critical positions results in poor performance and poor service delivery.

On transfers, he said in some instances there were full payments made of 100% and in other instances there were staggered payments and that needed further explanation. The turnaround plan involved the planned selling of non-core assets, so which assets are these and to what extent were they a drain on the resources of SAPO? On the proposed investment of the R3.7 billion that had been earmarked for loan repayments to the commercial banks, he asked if negotiations had been entered into with the lenders that would free part of that money for investment and what the implications would be. It was important to establish what the operational costs would be for SAPO going forward because if that was not settled, it would find itself in the same problems. He asked for details of the understanding that had been reached between SASSA and SAPO on the social grants and if SAPO was ready to offer these services.

Ms S Shope-Sithole (ANC) asked how well DTPS was doing on payment of service providers within the 30-day period. She asked how prepared SAPO was to work with SASSA and if they were going to engage consultants because the postal services left a lot to be desired.

Ms Phosa asked where DTPS got money to pay for their over-expenditure on transfers and subsidies which was R551.4 million. The PFMA allows for over-expenditure of 2% but DTPS had gone beyond that. DTPS used the language of "assisting" SAPO with its investment plans and accessing government business opportunities, but no concrete plans were outlined. In the last meeting with the committee, DTPS was tasked to develop an acceleration plan which was never submitted. On infrastructure support, you reported savings of R213.5 million on the SA Connect project. She asked DTPS if it had not learnt the lesson that if it does not use money, it is withdrawn by Treasury and in the long run this would impact on its budgets as Treasury would give them less money because they are failing to use money allocated to them. It is a budget principle that if money is not used, it is taken back by Treasury. She wondered why DTPS was so concerned about saving funds. This served no purpose as they were merely depriving people of the required services. The funds were not meant for DTPS but for service delivery.

Mr A Shaik Emam (NFP) asked what the challenges and weaknesses of SAPO were because the Post Office is not able to roll out or pay the social grants. What were their plans for the future so that the Post Office would be able to distribute the grants.

Mr Shelembe replied the reason they had brought such a big delegation was that they understood that they were not going to deal with financial matters only but general DTPS matters, hence, the presence of the managers. On the apparent disparity between money spent and targets achieved, he clarified that the targets were quarterly targets and not annual targets. Thus only a percentage of the budgeted funds were spent but the targets had been 100% achieved. On the 12% spent on goods and services, he disclosed that part of this included the broadband roll out project where there had not been sufficient movement. If the project were to be removed from the budget line, the figures would look healthier. He confirmed the 100% payment on the migration of digital signals was a once off payment for digital infrastructure.

On oversight on transfers and subsidies, Mr Shelembe affirmed that oversight is exercised over the entities particularly on the transfers themselves. There is a Treasury regulatory requirement that the utilisation of the transfers is monitored and occasional visits are made to the projects to ensure that they are running. He clarified that the R3.7 billion allocation was not to invest part of the funds in financial markets, but to invest in critical infrastructure which would facilitate the turnaround of the Post Office. They had a list of critical infrastructure items which include retail sale of point systems, track and trace systems, mail centre automation, e-commerce, financial systems improvements, revenue projects, IT Infrastructure and fleet and transport systems. These are the requirements that would improve the efficiency of the postal system and improve service delivery, as well as lead to new products and services. To establish business opportunities in government, DTPS visited 21 departments that are perceived to be critical to the viability of the Post Office with the hope of securing business opportunities, but this would still be done in a competitive process. No preference would be given to SAPO and the normal procurement processes would be adhered to. DTPS was committed to curbing unauthorised irregular, wasteful and fruitless expenditure, and financial controls were being improved continually and remedial action is undertaken.

Mr Shelembe  said DTPS had just published its SME Strategy which had been approved by Cabinet as a way of unlocking and developing the potential of SMEs. It was one of the few departments that had developed such a strategy for the promotion of SMEs, especially in the communications sector.

On the observation that some transfers were 100% effected while others were staggered, he reported that this arrangement was agreed to with Treasury and that the purpose of the transfers determined the nature of disbursement.

On the non-core assets which were proposed for sale, SAPO had been asked to develop a property management strategy. SAPO has a number of properties in its portfolio and they have been asked to identify which ones are not important for the needs of the organisation and can be disposed of.

On the negotiations with the lenders so that a part of the recapitalisation could be invested, he confirmed that negotiations had commenced with the lenders. If no investments are done, the Post Office will remain in the same financial position and would need further cash injections.

On whether SAPO is ready for the disbursement of social grants, there have been prolonged discussions between SAPO and SASSA which have been facilitated by the Inter-Ministerial Committee on Comprehensive Social Security which resulted in the signing of the Implementation Protocol which is a high-level understanding that the parties intend to work together. Subsequent to this protocol, the parties are expected to enter into a commercial agreement which will spell what SASSA expects SAPO to deliver and if SAPO needs to be placed in a financially sound position to be an agent. It is still unclear how much money SAPO needs in order to qualify to be an agent but that will become clear once the commercial agreement has been finalised.

The CFO noted that what appears to be a disconnect in DTPS between the levels of payments and the performance in achievement of targets, could be attributed to the fact that two of the targets involved the development of draft bills and the others involved the development of three strategies and all the work was done internally so the spending was minimal and there were savings. On the 12% underspending, SA Connect is part of goods and services that is why the spending is low. On the payment of financial assets with an overspend of R22 000, this includes households and households include the payment of leave gratuities and according to the budget framework, DTPS is not supposed to budget for that as people are paid as they leave and there is no budget for that. The same goes for variations in the exchange rates for international money transfers. On whether consultants were budgeted for, the SA Connect Roll out strategy did provide for consultants.

On the payment of SMEs within 30 days, a detailed written answer would be provided to the Committee but generally payment is made within the stipulated time except where there are disputes with invoices. On the virements, she said they were within the stipulated 8% and were mainly for the realignment of compensation of employees

Ms Phosa asked how DTPS intended to keep the R213.5 million saving on infrastructure support. She said the SA Connect project was stalling and that was why at the last meeting DTPS was asked to devise an accelerated plan but there was still no movement. She asked if the Committee needed to inform the Minister to apply consequence management on the DG because no progress was being made. The failure of DTPS to complete the project was having a negative impact on the people. She asked if she was right in her understanding that there were some slow transfers from Treasury; that there was an under expenditure because of slow transfers. She asked what happened to the infrastructure plans and cash flow projections.

The DDG for Infrastructure, Mr Tinyeko Ngobeni, replied that at the last meeting with the Committee and Treasury, a request had been made to re-classify the funds allocated to the SA Connect programme from goods and services to a transfer and it gave a detailed cash flow breakdown, but Treasury had since changed its earlier position saying that instead of doing a transfer, DTPS should just pay the entities from goods and services as per invoice. The initial thinking around the transfers was to enable the entities to plan much quicker and do the execution, but now they have to plan, execute and submit the invoice then DTPS pays. On whether it will be possible to spend all the money before the end of the year, the original plan was to appoint a single service provider responsible for roll out throughout the country but it was decided that multiple service providers should be appointed and that would increase the capacity of the service providers to do the roll out because they would focus on smaller designated areas. The process underway on the procurement side is to identify which government facilities are closer to which infrastructure to facilitate the allocation at the conclusion of the process. The sites have not yet been connected as that will be done by the service providers. The delays have been caused by the procurement and governance processes, and once these are finalised, the service providers will be identified to start the roll out.

Acting DG, Mr Shelembe, said the R3.7 billion had not yet been released by Treasury and negotiations were still going on about the possibility of investing the funds because if the debts are settled with the banks, SAPO will still need liquidity and there will be the need to approach the markets in one form or another.

Ms Phosa said she was concerned with the language such as ‘re-thinking’, ‘re-classifying’ and there was no movement. No progress was being made because DTPS was just thinking. At the implementation stage you are 're-classifying' the budget.

The CFO replied that according to the Standard Chart of Accounts (SCOA) classification there was nowhere where in the budget items they could place the services provided by the external service providers, so Treasury advised that the only place where this could be included was on the item of consultants. DTPS does budget for consultants largely driven by SA Connect. From the R507.4 million under goods and services, R411 million is earmarked for consultants but the overall budget for consultants is R434 million. DTPS has an overall operational budget of R162 million so the R66 million that was spent was from the operational budget which accounts for 41% of the operational budget. Nevertheless, that does not take away from the fact that only 12% of the goods and services budget was spent because even funds meant for the broadband roll over project fall under goods and services. The groups that fall under the consultants budget item include audit committee members, board members, agreements with universities, and agreements with CSIR to host cyber security, all of which are budgeted for under the same budget item. Some of the agreements are multi-year agreements and others are renewable yearly. The two DDG vacant positions had been advertised but because of the structural re-organisation that is taking place they had been placed on hold.

Ms Shope-Sithole requested that the next time DTPS appears before the Committee, they should bring a breakdown of goods and services. She asked how long the multi-year contracts are.

Mr Gcwabaza agreed with Ms Shope-Sithole about breaking down the goods and services item so that the cost of the actual infrastructure was separated from the cost of consultancy services.

Ms Phosa told DTPS they were not happy with the slow pace at which the SA Connect Broadband project was moving. It was important for this project to take off if South Africa was to compete with other parts of the world. She wondered if DTPS had capacitated staff. The conclusion of the Committee was that DTPS had no plan and that is why the broadband project had stalled. Their term of office was coming to an end in 2018 and Members wanted to ensure that this work was completed.

The Committee made a resolution that the stalled SA Connect Broadband project should be elevated to the Minister for action. The Committee again requested the development of an acceleration plan from DTPS that would outline a way forward for the project.

Ms Phosa thanked DTPS and asked them not to bring a big delegation the next time.

South African Post Office briefing
Mr Comfort Ngidi, Acting SAPO board chairperson, and Mr Mark Barnes, SAPO CEO, appeared before the Committee.

Ms Phosa asked Mr Ngidi why he was acting and he replied that he could not appoint himself and that he had been acting since 2016. He had already expressed his displeasure to the Department that it was not right.

Performance Overview
Mr Mark Barnes, SAPO CEO, presented a six months performance overview. He said the revenue of R2.3 billion had remained flat and steady for a declining business but that the real challenge was that they had not invested in growth or diversified in other sources of income. The expenses of R3 billion are predominantly made up of staff who account for 60% or R1.8 billion of the costs and this constrained cash flow.

On the non-financial side there were some positives. They were running the Digital Terrestrial Television (DTT) project which was proving quite successful. The delivery standard for mail has increased to 88.04% but the aim was to get into the high 90’s. Sometimes it takes longer to track mail but eventually they find everything. 115 579 new addresses have been rolled out to citizens. The Postbank licence application has advanced but there are two issues that require to be dealt with. The first one is a legislative: there is an inconsistency between the Banks Act and the Companies Act. The Banks Act requires for you to be a licenced bank, you need to be a public company, and the Banks Act states that a state owned company is not a public company. It is an oversight and it requires a one line amendment. They are waiting for Cabinet to approve that amendment as there was a misalignment when the two acts were promulgated.

In terms of the income statement, the core business registered a 2% decline resulting in a budget deficit of R848 million. R715 million had been budgeted for revenue growth initiatives but this was not achieved as there was no cash to invest in growth. Had the Postbank been licenced this would have been achieved. The mail revenue contribution was 62%. R57 million was raised from the DTT project and R150 million was raised from motor vehicle licensing which posted a 10% growth.

Postbank recorded revenue of R332 million (9% growth). The bank has reduced its costs by R277 million with staff costs declining by 2%. Interest on loans rose to R182 million from R101 million the previous year. The Post Office has a lot of infrastructure that is under-utilised. There was a net loss of R723 million which exceeded the budgeted net loss by R560 million. The current status without any new investments is that the Post Office is losing R100 million a month which translates into R1.2 billion a year. R716 million of that money is as a result of the Post Office complying with universal service obligations. That means post offices are running with a substantial mandate that will not make money. You cannot make money at R3.90 a letter delivering letters to Umtata at R480 rand a trip. That means that R716 million is an obligation of the state and the Post does not get a subsidy for it. The state does not return that money to the Post. The other R400 million is interest on the R3.7 billion loan. If the obligation of the state was to be subsidised and the Post Office was capitalised then it would break even. And the Post Office would also be able to use the social grants to invest in growth businesses which are of a commercial nature.

Balance Sheet
The balance sheet shows that SAPO is solvent as it has a total asset value of R13.3 billion. The property portfolio stands at R2.7 billion. The liabilities include the R3.7 billion long-term loan secured by government guarantee with an annual interest cost of R364 million. Postbank is a part of SAPO but it is an autonomous part. It has a net asset value of R2.9 billion. Deposits increased by 7% to R5.4 billion. It has cash and short term investments of R7.9 billion. There is a lot of excess capital lying idle in the Postbank – R3 billion on deposit. It is lying idle because the Postbank does not have a licence to lend money.  SAPO also has R8 billion on deposit with banks and Treasury which essentially lies idle. The deposit base, however, continues to grow by 7% which in banking terms is a significant growth rate. The Postbank has a very bright future. On the performance indicators, only 10 performance indicators out of 36 were achieved translating into 27.8% success rate but this has been mainly because of cash flow constraints and a lack of investment. Revenue of R1.132 billion achieved 71.6% of the budget and net interest income for the Postbank achieved 95.6% of the target. The mail delivery standard achieved 95.7% of the target. Customer complaints resolved within seven calendar days achieved 83.7% of the target.

Funding Requirements
The SAPO needs R350m to pay creditors for this financial year. There is a cash flow shortfall of R600 million for the 2018 financial year. R1 billion is needed to capitalise Capex to diversify income streams and become a competent player in the world of first class post offices. R1 billion will be needed to repay the loan and another R600 million will be needed to make up for cash flow shortfalls in the 2019 financial year. The total needed is R3.5 billion for a two-year outlook. Negotiations are currently being undertaken for an overdraft facility of R400 million with Treasury providing the guarantee. SAPO will advocate toretain R1 billion of the loan facility. Postbank is over capitalised with R3 billion of excess cash only earning 3 to 4% after tax and some of that money could be used in growth businesses to earn a much greater return and the proposal is to get R500 million. However, negotiations would be needed as Postbank is treated as an autonomous company with its own board and it is the seventh biggest bank in the country. SAPO wants to be independently financed for two reasons: firstly, after the capital injection from Treasury there will be quite a strong balance sheet and, secondly, SAPO has an extremely impressive portfolio of assets and property. SAPO would like to raise a bond against some of the properties worth R1 billion. Then there would be plans to get a retail bond. In the past, SAPO used to issue bonds which were high yielding bonds of about 8%, but now customers are being paid 3% on deposits. Capital independence would allow SAPO to issue bonds but as at now it is not possible because SAPO is dependent on commercial banks and on the government for loan guarantees.

Social Mandate and Business
SAPO is a mixture of a government service and a commercial enterprise and these two kinds of business need to be managed differently and separately. It is when they are mixed together and made subject to the same set of rules that you get a mixed non-productive set of results. At the centre is the mail business and in today’s world it is primarily a service as SAPO incurs 700million in expenditure a year in maintaining addresses and maintaining a presence in remote areas that are not commercially viable. E-commerce is a very good business. SAPO has already increased its space at OR Tambo International Airport by 70% and there are plans to make SAPO a regional hub for the whole of SADC because South Africa has the best airport in SADC, but also because South Africa has harbours which some countries do not. There is stated interest from international partners that are waiting to be partners in technology and capital. It has been the saviour to post offices throughout the world. In India e-commerce is growing at a rate of 100% per year and the same possibilities exist in South Africa. On the bank side, as indicated above, SAPO is eager to get Postbank licensed so that it can begin to make money. SAPO sees Postbank as a transactional bank for government bearing in mind that SASSA grants are not a risk and it is just a facility to get money from government to its citizens. The question that is often asked at SAPO is whether SAPO is a government department or a competitive business and the answer is that it is both. SAPO infrastructure should be populated by state services. SAPO is no longer a monopoly and it no longer enjoys protection so it has to compete with other players. What is required is a public-private partnership. The request SAPO is making is for government to fund the public mandate and on the commercial side SAPO establish commercial partnerships to bring in new technology.

Discussion
Mr B Topham (DA) asked if the net asset value was R1 billion or R2.7 billion. He asked how SAPO hoped to get R500 million from the Postbank and if that would be considered a loan that would acquire interest. He observed that if the core business of SAPO was delivering mail, they needed to do it more effectively.

Ms Senokoanyane said she was happy with the proposals presented and expressed the hope that they would come to fruition. She expressed disappointment with the work ethic at post offices where sometimes there is disregard for the interests of the customers. She complained that some post offices do not have point of sale machine for cashless transactions and that some post offices only ask for Visa cards and no other cards. She asked if all post offices are supposed to have electronic payment facilities. She asked about the state of readiness of SAPO to work with SASSA on the social grants.

Ms Shope-Sithole asked if SAPO was complying with the regulatory 30-day period to pay service providers and if they have evergreen contracts. If so, she requested they provide a list to the Committee of the duration of those contracts.

Ms Shinn referred to Mr Barnes’ disclosure that the funding plans have not yet been approved by the Board or the Minister and asked if they were enthused by the ideas. She asked what Treasury thought of the proposals and if they would be included in the budget. On the proposed property bonds and retail bonds, she asked, if approved, how long it would take for them to be available to investors. She asked when the R3.7 billion would be released by Treasury.

Mr Topham agreed that a state-owned company such as SAPO has a social mandate and that is not the case with SAA. It would be important to have the figure that is spent on the social mandate considered by auditors to justify the reason for a continued subsidy of that part. He asked for clarity on how e-commerce operates.

Ms Senokoanyane asked why some post offices in beautiful malls do not have facilities for motor vehicle licences. She asked how SAPO makes its choices of where to have the motor vehicle licensing facilities.

Mr Gcwabaza noted the non-core assets such as property which could be disposed of to raise money. He asked the CEO to indicate clearly what would be considered non-core. The Committee would be worried if it sold property that was considered non-core.

Mr Barnes replied that at this stage Postbank is a division of the Post Office Group. It is not a separate entity. A separate entity called Postbank Ltd SOC has been created which is a registered company in anticipation of the banking licence. When that licence comes through, the liabilities and assets of the bank will be transferred into that entity and it has its own Reserve Bank-approved board of directors. The net assets of the bank are R3 billion but when you add the losses in from the rest of the Group, it is coming down to R1 billion.

On accessing the R500 million in Postbank, he replied that technically that money belongs to the Group, so it can just be transferred out, but up to this point the Postbank has been treated as an autonomous entity and no money has been taken out since 2002. The other reason that SAPO would want to transfer that money is that Postbank has been given a tax shield, they do not pay tax. They are treated as autonomous, but they are not autonomous. When the tax shield is added up it comes to R500 million. Essentially that money belongs to SAPO from a technical and economic point of view. The money would be invested in new revenue streams and not to service debts. The R716 million for its social mandate is calculated every year. In the future, it could be considered a socio-economic mandate as financial inclusion is a profitable business. This is for two primary reasons: firstly, people who have never had access to borrowings, if properly structured, have demonstrated trust and credit worthiness in the informal saving systems that they are already involved in and poor people need to come back for more money and their behavioural response to maturely lent money is very positive. You should never lend money to the rich because they have a disdain for it. But if you lend money to people at the right price so that they could use it to build a business, to buy goods at R10 to sell it at R12, they will keep coming back; they will want more.

He apologised for late delivery of letters but he said late letters are not thrown away anymore. In SAPO when the load got heavy, we used to dump it in the street but that is not done anymore. The primary purpose of a banking licence is to get deposits from the public and SAPO has enough banking expertise. A banking licence is not needed to lend money, what is needed is just the National Credit Act approval. SAPO could lend money tomorrow by getting approval but they want to do it right in a sustainable way.

Mr Barnes replied that the way e-commerce works is that the country of exit gets most of the profits which is meant to spur people to do exports, so it would be advantageous if we had more products going outside the country. But new technology is needed to become competitive.

On the poor work ethic at post offices, he apologised and said that measures were being taken to improve the attitude and there were some success stories. All cards and not just Visa are accepted in post offices. On some post offices not offering the service of motor vehicle licensing, he disclosed that it is the Department of Transport that determines where the machines are installed and it is gazetted.

Mr Barnes regretted that suppliers were not paid within 30 days and that this had been the case for sometime because of cash flow constraints. There is only one evergreen contract that SAPO has with Nastech which supplies photocopiers.

On whether Cabinet supported SAPO future funding plans, he said he was not sure. On property and excess assets, he said currently SAPO only owns 58 properties with a total market value of R70 million. There are only a few spare pieces of land that they would consider selling. It was his policy not to sell and that property is what differentiates SAPO in terms of positioning as state infrastructure. If you go into any small town, the best building is the Post Office. It is just that the buildings are underutilised. He could be overruled but he had no intention of selling. All the property that had been sold by SAPO had been regretted. He cited an example of SAA who sold their assets and they had profit for one year, but they were back in financial problems thereafter and it created a dependency. The essence of SAPO is that they were the physical infrastructure of last delivery. If they sell that, they have nothing different to offer. He compared selling property to selling aeroplanes and then leasing them from somebody thereby creating a dependency.

On SASSA, Mr Barnes said the Inter-Ministerial Committee was called in to preside over the differences between SASSA and SAPO which resulted in the signing of a protocol which guided the parties to final agreement on service delivery. The process of examining the details has started and what was introduced publicly at SCOPA was the concept of being price competitive. SAPO is able to do electronic banking, it is able to do the card production; for cash delivery to rural areas, time was an issue, and there were various alternatives that were under discussion. There is a Constitutional Court ruling that says a new service provider must be found, so to the extent that SAPO can offer up its infrastructure, it will do so. The payment of social grants had been made out to appear complex but it is not complex; it is just big. SASSA and SAPO have plotted the map of South Africa at all the points of intersection and they found places where they are 5km away from the pay points and they were working together on that. Systems capacity can be bought off the shelf and there are contracts to produce the cards. The full rollout is still a matter of discussion and the extent to which SAPO would be involved is still a matter of debate. There was another challenge which was that the state should not try to replicate a system which in itself needs to be modernised and changed. People have had unfortunate experience at the post office and they think that is how the Postbank works. These two are two very different businesses. The Postbank is computerised and money lives in the computer and it is an efficient system. So SAPO can do what it has said it can do.

The Chairperson read out a media article which said: “The current social grant distributor, Cash Paymaster Services, is R1.8 billion per year but SAPO’s projected costs are R2.8 billion in the first year increasing to R3.7 billion in the second year”. She said this is tax payers’ money that has been allocated to take care of social grants. She asked for an explanation on this because it did not seem right to take a bigger chunk of the money that was meant for social security. Government does not generate money but uses tax payers’ money so it was not right to take a bigger chunk. The outcry was that the number of people on social grants needed to be increased; government has no money and it was not right to take advantage of the situation.

The SAPO board chairperson, Mr Ngidi, said some of that money would be used to build infrastructure that would benefit the taxpayer and would belong to government. There was misrepresentation in the article.

Ms Phosa insisted that it was not right for SAPO to take such a huge chunk that was meant for the people and that there was a need to undergo mental transformation to understand that government does not have money. She came from a social work background and such information was difficult for her to take. SAPO appeared to be coming as a rescuer but would end up being a killer. They needed to rethink the whole cost structure as no one was going to accept it. The country had been downgraded to junk status and there was nowhere government was going to get the money SAPO was asking for.

Ms Shope-Sithole suggested inviting SAPO to come and present the projected figures. She came from an accounting background while Ms Phosa came from a social background so perhaps they could meet half way. She asked SAPO to come with figures and clear schedules. She requested them not to bring lump sums but to have breakdowns.

Ms Shinn asked that the Post Office be accorded the chance to explain if the article Ms Phosa quoted was accurate. Ms Phosa had assumed that the article was accurate.

Ms Senokoanyane agreed with Ms Shinn saying that Mr Barnes should have been accorded the chance to give an explanation

Mr Barnes said that whatever money goes into SAPO stays within government. The money would not go into the private sector. If the state wants them to do it at any number, they will do it at that number. What SAPO did was to give a clear evaluation of the costs as they started from the base. The state will earn interest on all unearned monies which belong to the state. SAPO will provide a limited number of free ATM withdrawals which is a high percentage of the grant. This was not a case of comparing apples with pears, but it was a case of comparing apples with fish. The state has got to create an asset by building infrastructure. SAPO would build the system on behalf of the state to replace the state’s dependency on an outside service provider. They will become assets of the state. There is a cost related to replacing the system that is utilised by private sector participants. The way SAPO had built up the cost structure was that the money used for the system would come from SAPO and not Treasury and it would seek to recoup it over a five year system. SAPO was an organ of state and would subject the cost structure to the inspection of the Auditor-General. All the money would stay in fiscus as they build their own capacity and it would be a transparent system. The payment of social grants was not a private sector business but a government service. They had explained to Treasury the costings. If SAPO was to replicate the services that were being offered by the private sector, there were costs associated with that such as buying vehicles, armour those vehicles, cash dispensing machines, re-write the computer software, re-write the software that feeds the banking systems, and replace the cards that are already in existence. The bottom line is that government would be building its own house instead of paying rent.

Mr Ngidi said they would provide a breakdown of the figures so that the Committee could do its own comparative analysis. The important thing was to build state capacity instead of paying private firms that take the money out of the country

Mr Barnes said he did not know who had fed the press the information that was in the article and they had not responded to it because they were advised by the Inter-Ministerial Committee not to respond.

Mr Gcwabaza said he was putting a stop to the discussion as it was a sensitive matter that could not be discussed carelessly in public. It was about creating efficiencies agreed upon between SASSA and SAPO and that not a cent should be deducted from the end user. There was no need to create unnecessary hype. The key was creating a capacity to deliver.

The discussion on the matter was halted.

Ms Phosa thanked DTPS and SAPO for their presentations.

Adjustments Appropriation Bill
Ms Phosa tabled the Motion of Desirability on the Bill and the Committee agreed to this.

The Committee decided to meet the following day to complete the formalities and approve the Bill.

The meeting was adjourned.

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