A summary of this committee meeting is not yet available.
STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
17 September 2003
SOUTH AFRICAN POST OFFICE: HEARING
Chairperson: Mr Francois Beukman (NNP)
Documents Handed out:
SA Post Office Annual Report for 1997/1998
SA Post Office Annual Report for 1999/2000
SA Post Office Annual Report for 2001/2002
[electronic versions of these reports are not available]
The Post Office had not submitted annual reports from the year 1997 to 2001. They were called in to report to the Standing Committee on Public Accounts on the lack of reporting, and the following issues:
- Corporate Governance, which would focus on the Post Bank, PFMA compliance, annual reports, and use of consultants.
- Contractual obligations
- Human relations, which would focus on staffing and post-retirement medical aid
- Internal control
The Chairperson referred everyone to Chapter 4(42)(3) of the Constitution, which states that the National Assembly is selected to ensure government by the people, which it does by passing legislation, and by scrutinising and overseeing executive action. The exercise at hand was for the Committee to obtain an understanding of the financial situation at the Post Office, and then to report back to the House. Today's hearing would specifically focus on the financial periods 1997/ 1998, to the 2001/2 year. SCOPA believed this was an important interaction.
The Chairperson informed the Post Office of the following criteria as followed in hearings of this nature. Public entities or departments classified by SCOPA as falling into the Category A, due to an adverse, disclaimed or qualified audit opinion by the Auditor General are always called to a public hearing before SCOPA. The Committee did not want long-winded presentations or long explanations. They sought the basic facts as they are about financial management. Referring to the "Public Accounts Committee's of South Africa" handbook, made available by APAC, he said the following responses would be considered unsatisfactory: the long slide presentation, nitpicking, blaming problems experienced on transformation, and making the excuse that problems originated "before my time".
Some of the concerns which SCOPA had were: corporate governance, contractual obligations, and internal control.
Opening remarks by Hearing Convenor, Ms K Mothogae
Ms Mothogae stated that SCOPA was concerned that, although the current report (2001/2) was unqualified, the reports before that, all the way back to 1997, were qualified. There was uncertainty surrounding the financial stability of the Post Office. SCOPA wanted to interact with management, to check on the constraints experienced, if any, and to determine if the body was in compliance with the PFMA, Treasury regulations, and the Postal Services Act of 1998.
The areas in which the Post Office would be engaged for questioning would be:
1. Corporate Governance, which would focus on the Post Bank, PFMA compliance, annual reports, and use of consultants.
2. Contractual obligations
3. Human relations, which would focus on staffing and post-retirement medical aid
4. Internal control
Opening remarks by CEO of the SA Post Office Board
Mr M Manyatshe (CEO of the Board) informed the Committee that the present management and Board of the SA Post Office came into being in August 2000. Most of the concerns expressed were for the years 1997, 1998, and 1999. When the present management came into the organisation, the Post Office was running at a loss of R1 billion. A company called PX had been given to the Post Office, and there had been an agreement made with a company called XPS in the amount of R60 million. The new management and Board inherited a company, therefore, with the potential of making losses greater than R1 billion. They have reduced those losses consistently over the last three years. With the projects and processes that have been implemented, the CEO was confident that those losses would be even further reduced.
1. Corporate Governance: Mr B Bell (DA)
Mr Bell congratulated the Post Office on reports that seemed to indicate that the negative situation at the Post Office seemed to be turning around. At the same time, the Committee needed to understand what had happened in the past, to bring about the negative state of affairs that had existed.
It had been found that monies invested into the Post Bank by clients had been used by the Post Office to pay for current operations. Mr Bell asked if this was still the practice, and if the CEO could assure the Committee that the Post Bank was truly a trust fund, as opposed to a fund to be used by the CEO and Chairman to "top up" funds not received from Government.
Mr Manyatshe responded that on the arrival of the present management and Board in 2000, there were insufficient competencies within the SA Post Office to manage the company in a proper manner. They realised that monies from the Post Bank had been used, and this matter was raised with the Department, the Ministry and with National Treasury. They then agreed to put "Chinese walls" around the Post Bank money. The Post Office and Post Bank monies are banked separately on a daily basis, and are kept separate. All the Post Bank monies are now invested, and the only people authorised to release those funds, are the Chairman and the CFO. Post Bank monies would never again be used for the Post Office's operational purposes.
Mr Bell asked what measures were implemented to overcome the internal control weaknesses identified by the auditors in the previous annual reports.
Mr Manyatshe responded that the damage had been done when the New Zealanders had been brought into the Post Office, because at that time the Post Office management did not understand the terms of the New Zealand contract. There was therefore no way for them to properly manage the contract. They have since introduced a very rigorous delegation of authority within the organisation, where contracts are no longer signed at Post Office level.
In the past, the audit unit was not empowered to audit the organisation without receiving prior permission. Now, the internal audit unit is strongly empowered. It is able to perform audits at will, and it reports directly to the Board.
In the past, many people in the organisation were not qualified for the positions which they held. Today, staff members are more appropriately qualified, and many chartered accountants from the private sector have been recruited. He could confidently report that by the seventh day of each month, management was well-informed on where the organisation stood with regard to operations of the previous month, on where they were "lagging behind", and on where they were ahead. He was confident that the SA Post Office was on par with any company that was presently being run.
Mr Bell asked what major risk areas had been identified, and how management was responding to the situation.
Mr N Buick (Chief Financial Officer) stated that some 500 audit management letter points had been raised two years ago. Tackling that was "a huge undertaking". They categorised the points by division, attacking them every month. Monthly reports are given to the Executive Committee, and to the Audit Committee, on all business units having management letter points. In 2001, of 343 points, 67% have now been completed. In 2002, of 191 points, 106 have been completed. Although he accepted that there were still high risk items, he said the numbers were decreasing dramatically.
Mr Manyatshe stated that risk management, which had not been performed in the past, was now being conscientiously performed. A function which the organisation plans to perform this year, is to make asset verification for the whole organisation, from top to bottom. Once that has been completed, most of the outstanding issues will have been addressed. Another outstanding issue is the IT environment. They have approached IT experts, to ensure that the South African Post Office has an IT system which assists in ensuring a high level of security for the organisation. The organisation has moved on from apprehending those people responsible for misconduct, to setting up preventive measures.
Mr Bell asked how far the department had come in complying with the PFMA.
Mr M Brey (Audit Committee) informed the Committee that, as far as he was aware, the department was fully compliant with the PFMA, since the outstanding requirements which had been pointed out by the auditors, had been addressed.
Mr Bell said that the Committee had noted the extensive use of consultants by the Post Office. He asked if the department had studied and implemented the recommendations in the special report produced by the Auditor-General on the use of consultants. He further asked if the Post Office received any value from the use of consultants, and if the Committee could be provided with a list of consultants used, the amounts paid, and their terms of reference.
Mr Manyatshe informed the Committee that the use of consultants had been dropping dramatically. In the year 2000, they were paying hundreds of millions to consultants. Presently, the figure stands at about R40 million. He said that unfortunately, South Africa took too long to respond to the world-wide changing trends in postal services. Postal services are transforming to have three major businesses: the mailing system, financial services, and courier services. Capabilities for the latter two services do not lie within the South African Post Office, which necessitates that the Post Office must look for this expertise externally. When the Post Office inherited XPS and PX, which were making a loss of about R450 million, they made use of consultants to transform those courier services. They have now "broken even", and are making profits, proving that the money paid to the consultants was well-spent. Mr Manyatshe said that the Post Office had read the Auditor-General's advice on the engagement of consultants. They have a rigorous method of engaging with consultants, and on securing delivery expectations. They also have an assessment method in use. Because of this, a number of consultants had not received full payment for services in the past, as the Post Office had not been satisfied that the work delivered was in fulfillment of contractual agreements. The basic philosophy of the South African Post Office in engaging a consultant, is that it must be a self-funding exercise.
Mr Buick added that consultancy fees in 2002 had been R87 million, and those fees were being reduced to R35 million for 2003.
According to a KPMG report, management had implemented nine new initiatives, which seemed to Mr Bell a huge number to control. He asked what the progress was with these initiatives, and if the Post Office had the management expertise to monitor all of them. He wanted an assurance that the initiatives were achievable, and that the Post Office was not "biting off more than it could chew".
Mr Manyatshe said that the challenge for the Post Office at the moment, was that it is becoming more of an IT company, and the changes in IT are happening faster than the Post Office can keep up with. Some of the new initiatives are: the acquiring of a digital certificate, hybrid mail, mailroom management, rationalisation of the courier business, fleet efficiency improvements, and staff efficiencies. Mr Manyatshe informed the Committee that the Post Office was in the process of managing all these initiatives, and that they were able to ensure the efficient implementation of all of them.
Mr Bell asked if, according to PFMA requirements, the Post Office had a Fraud Prevention Committee and an Investment Committee in place, and if so, how effectively they were operating.
Mr Manyatshe responded that the Post Office had a Fraud Prevention Committee, with a Fraud Prevention Plan which had been rolled out to the lowest levels of the organisation.
Mr Buick added that there was also an Investment Committee, called the Asset and Liability Committee (ALCO). ALCO meets on a monthly basis, where all investment strategies designed around the investment strategic policy, are considered. Post Bank investments are managed according to this policy. The Committee includes the CFO, the Managing Director of Post Bank, and external representation, to ensure prudent decisions are made.
Mr Bell asked if any fruitless and irregular expenditure had been identified over the last number of years.
Mr Manyatshe replied that the major issue with regard to fruitless expenditure, were the properties owned by the companies within the Post Office, which were either under-occupied or empty. Although amounts lost through these properties for the first year was around R40 million, those losses have now decreased substantially.
2. Contractual Obligations: Mr M Robertson (ANC)
Mr Robertson asked what had led to the cancellation of the contract between the South African Post Office and New Zealand, what had been the amount of money involved, and how much money had been paid in terms of breach of contract.
Mr Manyatshe said that management had recommended the cancellation of the contract to Cabinet, since it had become clear that the initial intentions of the contract would not be achieved. It had been planned that by March 2001, the Post Office would "break even", but instead it made R1 billion loss. It was clear that the New Zealand contractors did not have the expertise required to reach the objectives of the contract, nor were they financially astute. Continuance of the contract would also have caused the over-dependence of the South African Post Office upon the contractors. He said that the contractors had been paid R123 million. They had only been paid for work done, and there had been no cancellation fee.
Mr Robertson wanted to know how many contracts the Post Office still had, and the costs involved.
Mr Manyatshe responded that the Post Office had contracts with ATH and Telkom for IT network roll-out, and those contracts would take a further two years to complete.
Mr Robertson asked to be informed of the status of vacant leased or sold properties.
Mr Manyatshe that in the last two years, the Post Office had been in the process of getting rid of the pieces of land which were not needed. In general, the Post Office aims to be located in shopping centres, rather than in isolated buildings. They were no longer in the business of owning land.
Mr Robertson asked for an approximate figure of the annual amounts being paid for the rent of unused properties.
Mr Buick responded that he did not have that information on hand, but that he would forward it to the Committee.
Mr Robertson asked if any of the funds subsidised by Government had been used for the funding of losses by subsidiary companies like CFG.
Mr Manyatshe responded that the subsidy which the Post Office has, is being used for specific projects, and those funds are audited by external auditors. The monies are not being used to fund CFG.
3. Human Relations: Ms K Mothoagae
Ms Mothoagae asked if the CEO could inform the Committee of the staff complements in his entity. She wanted to know how many people were in senior management, what their skill profiles were.
Mr Manyatshe replied that there were about 18000 people on staff. The Executive consists of thirteen people, of which two are white males, four are females, and the rest are black males. He would obtain the rest of the figures from Human Resources, and forward them to the Committee.
Ms Mothoagae asked what management was planning to do about the Post Retirement Medical Aid, which was consuming the entity's budget.
Mr Buick responded that the Post Office was taking a lot of steps to reduce this enormous liability of R2.3 billion, which included: (1) the termination of the post retirement subsidy for all new staff; (2) upon promotion to another position, an employee is no longer entitled to the subsidy; (3) a settlement option has been established for people who want to take voluntary segregation packages instead; (4) options for people currently on pension, are also being considered.
Ms Mothoagae asked if any staff had taken the Post Office to the CCMA, to which Mr Buick responded that there had been none to his knowledge.
Mr Manyatshe said that some staff members had brought charges before the Medical Aid Council, over how the matter had been handled. The Post Office won the matter, however.
4. Internal Control: Mr F. Beukman
Mr Beukman noted the indication that the number of internal control problems had diminished. However, there were major issues for concern, many of which centred around contract management. The contract management policy of the Post Office has not been finalised, or formally directed in writing to all officials. A comprehensive contract register for all contracts that have been entered into, does not exist. Contracts exist that have been concluded on different terms and conditions than terms and conditions approved by the Board of Directors. Numerous other weaknesses were identified surrounding the conclusion and management of contracts. He asked what was being done by management to rectify these problems.
Mr Manyatshe responded that the Post Office was implementing a system whereby the Board can, on receipt of reports or recommendations, assure itself that internal auditing has taken place from the very inception of contracts entered into, to the completion thereof. Before the completion of the contract, the same auditors must determine that the contract confirms what was originally agreed by the Board or the Tender Evaluation Committee. All tenders going to the Tender Board must have a business case, showing the duration for the project, the "pay-back" for the company, and various other information. He was confident that all steps being taken will address some of the shortfalls.
However, he added that some of the tenders are too complicated for Post Office staff to deal with. Experts are therefore required to train staff with the evaluation of tenders.
Mr Beukman asked who was responsible for the delegation of contract management.
Mr Manyatshe explained that the General Manager in charge of procurement was responsible for the day-to-day management of contracts.
Mr Brey stated that the Post Office now required a review process in terms of a post-contract or post-investment review six or twelve months into the contract. This would show what, in terms of the contract, was being achieved, if the terms and conditions were still the same, and if the actual benefits, which had initially been proposed, were forthcoming.
With regard to Mr Manyatshe's statement that consultants would be required to assist staff in contract evaluation, Mr Beukman asked if the answer did not lie in strengthening the legal section of the Post Office.
Mr Brey responded that the new review process ensured that much of the problems associated with contracts, were eliminated.
Ms D Mokone (Chairman of the Board) informed the Committee that as a result of what happened in procurement, the Post Office had decided to implement a forensic audit into procurement, to determine what had gone wrong. They had taken note of the suggestion to strengthen the legal department.
Ms Reed (Partner: KPMG) said they were confident that management and the Board were seriously considering the contract management process, and implementing systems to prevent similar problems from recurring.
Mr Buick added that by way of another control, they now have a template which accompanies contract before they are signed. This template must be signed off by legal staff, the CFO and the CEO, to ensure that the contract terms agree in totality with the terms agreed to by the Board.
Mr Brey informed the Committee that they had asked management for a national mechanism, agreed to by Government, by which bad contractors could be blacklisted, so that other parastatals could be made aware of their bad practices.
Mr Beukman noted it had been found that controls regarding the authorisation and recording of leave were not being adequately adhered to. The Human Resources Department generates and sends monthly cost distribution reports to line managements, to certify that all employees listed in the reports are indeed employed in the cost centres. There are, however, no controls to ensure that line managements acknowledge receipt of the reports.
Mr Manyatshe commented this was a weakness which came as a result of automation. Before, these checks had been performed manually. Now, people don't look into the electronic versions of reports. Post Office staff are informed in Ethics and Code of Conduct workshops held throughout the country, that they are held fully responsible for costs going through the cost centres. This was in order to sensitise employees to becoming accountable, so that departments whose managers have not signed off for the people employed in their departments, would not receive salary payouts.
Mr Beukman noted that a number of weaknesses exist around the issue of payroll-related taxes and income tax at the Post Office. He asked what was being done by the Post Office to rectify the situation.
Mr Brey responded that the Audit Committee had decided on a "no compromise" approach on this issue. Whatever monies were due to be paid, had to be paid.
Mr Manyatshe said that many companies existed within the Post Office. The Post Office was determined to build expertise around those activities which were common to all of them. To this extent, they have now employed a tax expert to assist them. Small organisations like DOCEX employ a minimal amount of people who perform a multitude of functions. Those functions are being centralised, so that salaries and Pay As You Earn (PAYE) benefits, amongst other things, can be managed centrally by people who have developed the expertise to efficiently perform those tasks.
Mr Beukman asked what management was doing to address the problem that international mail was being incorrectly handled, in that large numbers of documents were going missing, and there was a backlog in the processing of data.
Mr Manyatshe said that this problem had been addressed. The international division at Head Office, at which documents often went lost, was relocated back to Johannesburg International. The General Manager there is responsible to ensure that documents coming in, are immediately captured.
Mr Buick added that since the focus that had been placed on this problem, the Post Office had recovered R20 million in additional revenue, as a result of finding documentation that had not been processed. The international interface system at present is manually journalised into the general ledger of the company. The Post Office is investing in a new system which will automate the interface, and generate invoices and revenue at the same time that the waybill is signed, so that manual capturing will no longer be required.
Mr Beukman asked if there were any developments around the prevention of money laundering through the Post Office.
Mr Buick responded that recent legislation in terms of the Financial Intelligence Act, puts responsibilities on financial institutions to implement certain controls. The Post Office has done a complete overhaul of its processes and procedures in the light of that legislation, and those revised policies have gone through to the FIC for approval. They are currently embarking upon a training and roll-out programme, to commence in October. As soon as the processes are approved by the relevant authority, they will be implemented across the company.
Mr Beukman asked if this meant that it was at the moment possible for individuals to launder money through the Post Office.
Mr Manyatshe responded that even before the formal launch of this programme, management had asked to be made aware of any suspiciously high amounts of money coming into the Post Office. So far, there had been only two of these, which the Post Office had established were legally correct.
Mr Beukman commented the general IT controls review had highlighted certain weaknesses. He asked what steps had been taken by management to ensure that the weaknesses were sufficiently dealt with.
Mr Manyatshe conceded that IT had been one of the Post Office's greatest weaknesses. They had now centralised the management of all the contracts on software, and the other IT contracts, to esnuret hat they were all in line. They had also recruited people from the private sector who had more experience than previous IT staff. They are in the process of developing service level agreements, with all departments in the Post Office, where there will be agreement in terms of what will be expected of all departments.
With regard to the security of information, Mr Beukman noted that the security policy had last been updated in 2000. He identified various weaknesses in the security policy, and asked what steps were being taken to improve the state of affairs.
Mr Manyatshe responded that a contract had just been awarded to install a new firewall. In addition this, an intrusion detection system (IDS) was also being fitted. The assistance of experts in the security environment has been brought in to help the Post Office build up a "robust" security system.
Mr Beukman noted that the Post Office does not have a formal system development project management methodology. He asked if management was committed to ensuring the formalisation of this system in the Post Office.
Mr Manyatshe confirmed that with the appointment of a new CIO, this process had already begun. As the CEO, he should ask for the process to be formally documented, so that even should the CIO leave, the Post Office would have a formal process within which project management and development will be performed. He was not able to supply the Committee with a date by which this system would be formalised.
Mr Beukman asked what was being done to ensure skills retention and development within the Post Office.
Mr Buick responded that this area had received much attention over the past year. Since the business nature of the Post Office was changing, that required more skills in the Post Office procurement area. All processes and procedures in procurement had been completely redefined, to meet the standards of international best practices. They had also recently acquired an e-procurement system, whereby people tender for contracts on-line. This diminishes the costs of awards, and improves controls. The Post Office had also restructured, to move from "old procurement" to strategic sourcing. The senior job categories had been redefined, to make them more attractive in terms of recruiting competent external people to fill those positions.
Mr Beukman asked for the status of the plan to provide each South African individual with a postal address.
Mr Manyatshe responded that South African citizens were given a first address free of charge. He was of the opinion that the Post Office systems were not ready to distinguish between the first and second address, and who should pay. A project team is working at a national address management system.
Regarding properties, Mr Beukman noted that formal rental agreements had still not been concluded between the Post Office and Telkom on property rented by Telkom. He asked what was going to be done to rectify the situation.
Mr Manyatshe responded that when Telkom and the Post Office were separated, proper agreements had not been made about payments that should be made. A joint team between the two entities had reached agreement regarding these payments. By the end of 2003, the issue will have been resolved.
Ms Mothoagae asked why management was spending R4 million on a choir competition.
Mr Manyatshe regarded the money being spent on the choir competition as money well-spent, as it was serving to bring unity within the organisation. Previously, the organisation had been "completely in disarray", the staff having no community spirit. From what he had observed thus far, the run-up to the competition had facilitated the forging of good relationships. He added that R4 million was not a lot of money to spend to bring team spirit into an organisation such as the Post Office.
Ms Mothoagae noted that it was said that the terms of the PFMA were being implemented by the Post Office. However, in the annual report ending 31 March 2002, the CEO reported on behalf of the Audit Committee, whereas the PFMA required the Audit Committee to submit its own report. She asked to be informed as to why this had happened.
Mr Brey informed the Committee that the 2003 annual report would contain a separate report by the Audit Committee.
Mr Bell asked if the Post Office had a policy regarding whistle-blowers.
Mr Manyatshe responded that the Post Office has a whistle-blowing system. An 0800 number is available to anyone who wants to inform management of unethical and illegal practices within the Post Office.
Mr Bell asked if the CEO had any knowledge of senior management who owe the entity money, how much, and when the money would be repaid.
Mr Manyatshe responded that there instances where senior managers had gone overseas, and the monies for those trips had not been reconciled. The matter had been dealt with, and was being reconciled.
Closing Remarks by Hearing Convenor, Ms K Mothoagae
Ms Mothoagae indicated to the Post Office management that SCOPA's task was to ensure proper financial management, and that state resources were spent and protected. Financial management and accountability, and internal audit functions, must be observed. It was hoped that the current problems would not be repeated in the next annual report.
The Chairperson thanked everyone for the interaction, saying the Committee would await the promised information.
The meeting was adjourned.
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