THE SOUTH AFRICAN BROADCASTING CORPORATION: PROGRESS REPORT ON COMPLIANCE WITH THE CONDITIONS OF THE GOVERNMENT GUARANTEE
Background
During 2009, there was a significant decline in the performance of the SABC to a point where the entity was unable to meet its financial obligations and applied for support from government in the form of a guarantee amounting to R1.473 billion. In terms of Section 66(3)(c) and Section 70(1) (b) of the PFMA the Minister of Communications requested the concurrence of the Minister of Finance to issue such a guarantee. Having considered the initial request, the Minister of Finance wrote to the Minister of Communications on 5 November 2009 requesting that the following matters be addressed:
•	An indication from the SABC, supported by the DOC, of the amount over and above the R580 million overdraft that would be needed immediately to settle the most urgent debts (broken down by the respective creditors and by age);
•	Submission of a breakdown of the possible uses of the remainder of the funds raised on the back of the guarantee and the likely time by which the funds would be used;
•	The DoC and SABC to furnish details on total cost cutting measures to be effected before the end of the financial year and in subsequent years, and a breakdown of these components of expenditure;
•	Additional details on the revenue enhancement measures to be put in place and the amount of additional revenues these will yield in that financial year and in subsequent years.

The SABC provided the following information:
•	Current cash flow requirements of the SABC;
•	Summarised information on the cost savings and revenue enhancement measures;
•	Additional commitments toward ensuring the implementation of measurable performance agreements and the appointment of an interim Chief Financial Officer; and
•	Detailed information relating to the most urgent financial commitments facing the SABC.

The information requested from the DOC was not submitted.  However, given the urgent need by the SABC for the funding to be supported by the guarantee and for the finalisation of the financial statements before the expiry of the tenure of the Interim Board of the SABC, the Minister of Finance concurred to the issuance of a R1 billion guarantee. The following conditions were attached to the issuance of the guarantee:
1.	A detailed project plan be developed by the SABC, in conjunction with the DoC, outlining milestones, timelines and executives responsible for achieving each of the identified cost saving and revenue enhancement initiatives committed to in the guarantee application.
2.	A detailed project plan be developed by the SABC, in conjunction with the DoC, outlining milestones, timelines and the executives responsible for implementing the corrective actions to be taken to address the issues identified in the various reports including the Auditor-General and Task Team reports. 

3.	Within three months of the permanent Board’s appointment a new shareholder compact aligned to the commitments made by the interim Board to be signed by the new Board and a signed copy shared with the National Treasury.
4.	The SABC to report on a monthly basis to a task team comprised of officials from the National Treasury and the DoC, regarding the progress in terms of the project plans mentioned above.
5.	The drawdown of the remaining R473 million to be contingent on the receipt of the outstanding supplementary information requested in the letter of 5 November 2009.

In accordance with point 4 above, a Monitoring Task Team (MTT) was established, which reports jointly to the Ministers of Communications and Finance. The MTT has responsibility for monitoring the SABC’s compliance with guarantee conditions, with specific regard to actual performance against the project plans that were to have been put in place. In addition, the MTT has responsibility for assessing the potential risks to the SABC delivering on the plan as well as monitoring the SABC’s financial performance, its financial position and capacity to meet its obligations in terms of the guaranteed loan.
Adherence to the guarantee conditions
1.	Project plan outlining milestones, timelines and executives responsible for achieving each of the identified cost saving and revenue enhancement initiatives.

The financial crises at the SABC which led to the bailout from government in 2009, was largely due to operational costs that were increasing at a rate far in excess of revenue growth. However, the SABC did not achieve most of the targets for 2010/11 for the cost cutting and revenue enhancement initiatives it had committed to in the guarantee application.   The SABC has still not sufficiently reduced personnel expenditure to the targeted levels. Personnel costs are a big cost driver and their reduction was central to the financial turnaround plan set out in the guarantee application. The cost savings that have been achieved are due in large part to under spending on content which has reinforced the decline in audience and listenership numbers, in particular of SABC 3. Consequently, the SABC has also not achieved the targeted share of advertising revenue envisaged in the business case presented in the application for the government guarantee. 

2.	Project plan outlining milestones, timelines and executives responsible for implementing the corrective actions to be taken to address the issues identified in the various reports, including the Auditor-General and Task Team reports. 

To meet the conditions of the guarantee, the turnaround strategy needed to clearly address the issues raised in the Auditor General’s (AG) report. One of the major findings of the AG related to the levels of wasteful expenditure (fruitless and unauthorised expenditure) at the SABC which needed to be urgently addressed. The MTT is yet to receive a project plan outlining how the SABC intends implementing the recommendations of the AG report of September 2009 and the progress report on actions that have been taken that the SABC has committed to provide is still outstanding. The MTT has not seen clear indications that corrective measures have been instituted in this regard. The MTT was also furnished with the performance agreements of the executives for 2011/12 after a protracted period of urging. It was expected that the turnaround initiatives would be contained in the performance agreements of senior SABC personnel. However, this has not been done adequately: many of the initiatives are not reflected in the performance agreements that were reviewed. As responsibilities have not been clearly assigned the resolution of the AG findings may not be receiving the attention it deserves.

3.	Shareholder compact aligned to the commitments made by the interim Board to be signed by the new Board and a signed copy shared with the National Treasury.

The SABC in the past financial year did not submit its Shareholder Compact on time. This is the case for the current financial year as the Shareholder Compact is yet to be discussed with the shareholder department, the Minister of Communications. As the company is proposing amendments to the cost cutting and revenue enhancement initiatives that formed the basis for the Ministers approving the original guarantee, the revised strategy will need to be resubmitted to the Ministers for approval to change the initiatives. This is required so as to ensure that the changes do not significantly increase the risk to government arising from the guarantee. If the changes are approved, then only a shareholder compact, which is based on the turnaround strategy can be finalised.

4.	Reporting by the SABC to a task team of officials from the National Treasury and the DOC

Of the guarantee conditions listed earlier, only the fourth condition has been met in full, i.e. the establishment of the MTT. That said, throughout 2010, the MTT experienced much frustration in obtaining information from the SABC. Information was not availed when requested and where information was received it was often inadequate for enabling the MTT to properly assess the progress and performance of the SABC vis-à-vis the conditions of the government guarantee. The financial information was particularly unreliable in the sense that the same financial information would vary from report to report. These challenges made the work of the MTT extremely difficult. 

Nevertheless, based on the limited information at its disposal, the MTT concluded that the SABC was making very slow progress in terms of developing and implementing a turnaround strategy to improve its financial position and address the critical issues highlighted in various reports including the Interim Board Turnaround Strategy and the Auditor-General report of September 2009.  Furthermore steps to address the unsustainable operational costs and revenue enhancement initiatives were limited and inadequate.

In recent months, there has been a notable improvement from the SABC in terms of submission of information. The SABC now submits on a monthly basis:
•	A CFO report;
•	Divisional income statement;
•	Turnaround strategy executive project update; 
•	Performance review report; 
Notwithstanding the improvement in reporting, there are still some inconsistencies in the financial information presented by the SABC, which will have to be addressed. 

In addition, the SABC has submitted the following information:
•	Corporate Plan; 
•	36 month cash flow projections (includes 3y financial projections)
•	Turnaround strategy executive project update (details turnaround initiatives)

The Corporate Plan did not meet the requirements of the PFMA and Treasury Regulations. In particular, it did not include three year projections of the financial statements. Hence, it was impossible t for the MTT to assess whether the turnaround initiatives that the SABC was proposing would achieve the desired turnaround of the institution. Subsequently, the SABC provided three year projections in the form of the 36 month cash flow projections. The analysis of the cash flows follows later in the report. The Turnaround strategy executive project update sets out the details of the turnaround initiatives the SABC is to undertake. What is still missing is the linking of each turnaround initiative to the financial impact to be achieved. The SABC has committed to consolidating these documents into a single, integrated document – the turnaround strategy for the organisation.
SABC’s Cash Flow Position 
During the course of the 2011/12, the SABC’s cash position has been improving due to increased cash being generated from operations. Moreover, improvements in financial discipline appear to be instituted and reinforced. However, this progress has been insufficient to achieve the turnaround results as envisaged in the submission for the government guarantee. Consequently, in the longer term, the SABC’s capacity to meet its obligations (including repaying the guaranteed loan) remains entirely dependent on the receipt of MTEF funding. 

Figure 1: 36 month cash flow projections

The SABC has submitted an application for funding to the Department of Communications (DOC).  The application needs to be considered by the DOC and, and where supported, the DOC will submit a request for consideration during the Budget process.  In meanwhile, the request has also been shared with the National Treasury and is summarised below. 

Figure 2: Summary of SABC’s MTEF request

For the 2011/12 Budget, the focus is on finding savings and reprioritising spending as very little additional funding will be made available. Included in the SABC’s request for funding is an amount for 2011/12. The PFMA allows additional funding to be allocated in the Adjustments Budget only where expenditure was unforeseen and unavoidable.

Comprehensive business plans for many of the requests (e.g. News 24, DTT, Sports Channel) are still outstanding. This documentation is required in order to understand the longer term financial impact on the SABC. Funding requests include amounts to cover operational expenditure whereas, in respect of DTT, the SABC had committed to cover these costs themselves.

The SABC has made advance payments of its loan amounting to approximately R110 million in an effort to reduce their debt exposure and to strengthen its position to negotiate for better terms of the loan (mainly a better interest rate). At the same time the SABC has proposed restructuring the loan to extend the loan term by a further two years so as to reduce the cash flow pressures on the institution. This would mean that the guarantee agreements would need to be amended and consequently the SABC has been advised to seek the approval from the Ministers of Communications and Finance in this regard through a submission clearly articulating the rationale and proposal for the restructuring. 
Conclusion 
There has been an improvement in the working relationship between the MTT and the SABC: documentation is more forthcoming and paints a clearer picture of the financial position of the SABC and progress on the turnaround. Still, there is still outstanding information which needs to be compiled and submitted, notably the consolidated documentation of the turnaround strategy and business plans for major undertakings like News 24 and DTT that the SABC wishes to undertake.

The SABC is still not meeting most of the guarantee conditions nor has it achieved many of the targets that it committed to in its guarantee application in respect of cost cutting and revenue enhancement initiatives. The failure to reduce the cost structure and the continued problems with content acquisition and management as well as delays in developing a turnaround strategy for SABC 3 continue to pose concerns for the longer term performance of the SABC. 

The SABC’s financial sustainability is premised entirely on an injection of funds through the MTEF process, and consequently the view of National Treasury is that substantial risks to the guarantee still remain.