Auditor-General on South African Post Office (SAPO) Predetermined Objectives; SAPO 3rd Quarter Performance; ICASA & SAPO Strategic Plan 2013

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Communications and Digital Technologies

15 April 2013
Chairperson: Mr S Kholwane (ANC)
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Meeting Summary

A presentation was made by the Auditor-General of South Africa (AGSA) on the South African Post Office (SAPO)’s predetermined objects for the year 2013/14 in which the Committee was informed that the purposes was to assess the usefulness of the information contained in SAPO’s corporate plan in terms of measurability and relevance of indicators and the measurability of targets. The findings of the review were that the targets had been well defined and that they would be easily verifiable. The overall conclusion was that the errors identified relating to the 2013/14 objectives were below the threshold that would lead to qualification of the audit report.

There were some overall challenges from an audit perspective that could impact on the achievement of the targets such as: vacancies in some of the key positions including supply chain management, chief information officer and chief operating officer; incidents in prior years of non-adherence to existing policies (regulations on fruitless, wasteful and irregular expenditure); resolution of prior year findings; non-compliance with laws and regulations specifically on fruitless, wasteful and irregular expenditure – in particular, supply chain management; weaknesses in contract management; and lack of policies and procedures for performance information.

Among the recommendations to address the challenges, there was a need to have clearly defined roles and responsibilities linked to the corporate plan and individual performance contracts in addition to developing and implementing standard operating procedures. A forum had to be established for the portfolio to share insights and have a consistent approach. Continual involvement of the auditors in the planning process for performance information and the establishment and implementation of action plans to resolve prior year findings were the other recommendations.   

The Committee asked questions on the ‘broad nature’ of the key recommendations, action plans taken to resolve the prior year findings, the number of prior year audit findings and the SAPO’s capacity to address them, reasons for key positions being vacant, weaknesses in contract management, and the adherence to existing policies. 
 
The South African Post Office presented its third quarter performance and group scorecard in which it informed the Committee that revenue remained a big challenge for SAPO in achieving its financial targets and the situation was worsened by the ongoing strike however corrections had been made to facilitate SAPO’s recovery. 872,610 motor vehicle licences had been renewed during the 3rd quarter and this represented one of the products that would be relevant for SAPO’s growth. SAPO had experienced a number of labour unrest incidents last year and the most recent in February. Management had assessed each one of the incidents and key challenges identified that were currently being addressed.

An additional 653 696 new addresses had been rolled out to date and 13 new points of presence were opened and 12 upgraded/relocated. There was an achievement of mail delivery standard by 89% and that a Financial Misconduct Framework was being rolled out.

The group financial overview showed that there was a R156 million loss and as per the third quarter, there was a net loss of R172 million. Revenue was below the budget by R196 million but up 2% from prior year. There was revenue shortfall due to customer consolidation of volumes posted, delay in the licence approval for the Trust Centre and loss of South African Social Security Agency (SASSA) business. Expenses were below budget by R22 million but up 6% from prior year. Lower revenues and withdrawal of subsidy for marginal Post Offices contributed to higher net loss position of R173 million. For instance the subsidy for the 2012 period was R181 million while in 2013 it was R51 million.

The revenue overview indicated that the Group’s revenue streams were below budget by 4% and the prior year change up by 2%. Mail revenue was below budget due to a decline in volumes from customer consolidations and the recent strike impacts. Digital revenue was below budget because of a delay in licence approval for the Trust Centre. Concerning logistics, there was a decline in customer volumes for certain courier items. Postbank was also affected by loss of customers and the delayed implementation of bank fees. The loss of SASSA business and a decline in third party payments affected financial services while lower interest rates and cash available for investment affected interest revenue. Sundry revenue was above budget due to the insurance claim payout for the Postbank fraud.

The expenses overview revealed that staff expenses were above budget by R16 million due to additional costs incurred during strike action and conversion of casual staff. Transport expenses were above budget by R42 million due to the increase in line-haul costs for the Transnet brokerage business, increase in airline costs and transport strike. Materials and services were below budget due to cost optimisation and lower spending during December 2012. The other expenses were below budget due to cost optimisation and R20.3 million reversal for the Transman legal case that SAPO won. SAPO was R33 million under budget due to critical vacant positions and R89 million over budget to casual labour net-off with R62 million savings from flexible staff costs. There was R27 million overspending on casual labour and R17 million for overtime related to additional costs incurred during the strike action.

The Capital Expenditure indicated that out of a budget of R250 million, the actual was R79 million as payments to suppliers, R140 million was committed for purchase orders issues, a total of R219 million was utilised and R30 million was unspent from the 2012/13 budget allocation.

In terms of the scorecard and in particular the measurement of Economic Performance Indicators, the third quarter target of 5.6% on top of declared revenue for 2011/12 for the Group revenue growth was partially achieved with 1.6% while the target of achieving Group operating profit of R18 million was not achieved with a negative of R156 million. Maintaining Group total cost as percentage of total income by 99.6% was partially achieved with an actual 103.6%. The target of growing Postbank non-interest revenue by R14 million was not achieved however, the target of growing Postbank depositors book by R190 million was achieve by R219 million. Return on asset was not achieved and the same applied to the expected return on equity of 2.3%. The targeted increase of total assets by R10.314 billion was partially achieved by R10.195 billion while the current ratio target of 1 was achieved by 1.25. Debtors days in terms of mail were not achieved while debtors days for courier were achieved by 53. The target of R187 million capital expenditure spend (paid and committed was achieved by R220 million.

The audit issues were categorised into three classes: red audits (critical), yellow audits (significant), and green audits (low). Their third quarter target was to achieve 10% of the red audit issues, 30% of the yellow audit issues and 60% of the green audit issues. However, only 24% of the targeted 10% of the red audit issues had been achieved: 60% for the yellow audits and 16% for the green audits. In resolving all the audit issues, 52 were still outstanding out of a total of 192.  Post Bank was one of the key projects that SAPO was focusing on and that since Postbank was operating under the Banks Act, it was looking at bringing on board about 100 people within the next twelve months.

The Committee asked questions on Postbank’s current situation, consideration of the business segments of the SAPO group to determine their profitability, components of the ‘expenses’ under the overview, anticipation of South African Airways delays under logistics, resolution of audit issues from prior years, measures to achieve the remaining 11% on mail delivery, achievement of the set targets on disabilities, the difference between permanent staff salaries and flexible staff expense, measures to address labour unrest, expansion of services to various post office outlets, funding of the losses, how much the strikes had cost SAPO and an elaboration on the Information and Communications Technology (ICT) Access alignment with the ICT infrastructure rollout.

SAPO presented its annual performance and corporate plan for 2013/14 to 2015/16 in which it was revealed that mail continued to be the biggest contributor but that there was also a need to identify other products that would contribute to the growth of the Group. There was a need to be agile enough to meet the various mandates in addition to looking at the business model to ensure that the business was self-reliant and self-sustainable without having to rely on subsidies.

SAPO’s focus would be on six focus areas in order to bring about an efficient sustainable business that was well defined and well communicated to the public, invest in people and also take them along in terms of building capacity for the future. Business operations would be aligned to customers’ needs, fostering good governance though review of internal policies. There would also be a focus on renewing and designing a physical network for the future as well as innovation with new products and services.

South Africa’s position in terms of benchmarking with international postal operators in which various elements were rated individually and scored in terms of overall performance had increased by one from 18 to 17 with the USA, Japan, South Korea and Australia leading the way. The licence agreement was the benchmark in measuring the delivery of targets such as frequency of collection and delivery, delivery point rollout, quality of service for mail items and customer care.

The critical success factors for SAPO would see a focus on people, process and systems. In terms of people, there would be an implementation of an effective Performance Management and Monitoring system, an appropriate skills mix to drive the strategic intent, reward and recognition as well as succession planning.

The Committee was informed that the strike that had lasted six weeks was illegal and based on false allegations of money being owed to workers. 588 employees were on strike and SAPO had to go through all the right procedures in resolving the matter including mediation that took long. There was no formal procedure for the strike and the employees on strike did not want representation by the unions making it difficult to engage with them. SAPO had to terminate the employment contracts of those on strike. The Congress of South African Trade Unions (COSATU) had since been involved to investigate the matter.

In terms of the financial plan, SAPO was anticipating a loss of R80.3 million for the 2013/14 financial year and a loss of R29.5 million for the 2014/15 financial year. There would however be a turnaround in 2015/16 with a profit of R10.5 million, a profit of R64 million in 2016/17 and a profit of R80 million in 2017/18.

The Committee raised questions on cross subsidisation, strategies that would to SAPO’s self-sustenance, further interventions to be undertaken other than cost saving and the basis for the projections, online uptime target, set top boxes, universal services obligations, internal crime rate, the effect of courier on SAPO’s financials and an investigation into the causes of the strike.

The Independent Communications Authority of South Africa (ICASA) presenting on its Strategic Plan 2014-2018 and Budget 2013/14 informed the Committee that ICASA had to consider the eight 2012/13 strategic goals that included ensuring effective participation by historically disadvantaged individuals in the industry, ensuring the provision of broadband services, optimisation of the use of radio frequency spectrum to support the widest variety of services with a view of determining if there were enough financial resources to achieve them within a particular time. ICASA had assessed its performance in relation to targets set, the budget allocation received and the demand of the industry together with government imperatives and as a result, the strategic priorities had to be revisited in line with the National Development Plan (NDP).

The five strategic goals and their respective objectives were: promotion of competition whose objectives included removal of bottlenecks to competition, ensuring that South Africa retail prices of ICT services fairly reflected costs and ensuring effective historically disadvantaged individuals and black economic empowerment participation in the sector; promotion of the digital agenda would see the facilitation of nation-wide broadband penetration by 2010 and the promotion of the development of public, community and commercial broadcasting services in the context of digital migration; promotion of efficient use of spectrum resources would lead to the establishment of innovative approaches to technology usage and support of the rapid uptake of new ICT technologies; protection of consumers would ensure the promotion of consumer rights and universal service and access; and the modernisation of ICASA would lead to an improvement in the operational processes and performance.

The overall lack of funding had an effect on a number of aspects such as: the availability of end-to-end spectrum management software, lack of state of the art broadcasting monitoring equipment, organisational restructuring and the need for change management, not having optimal funding for skills development and recruitment, capacity to perform monitoring to ensure quality of communication services. There were also delays in migration of terrestrial broadcasting from analogue to digital.

On the financial performance and funding, the expenditure estimate for the 2013/14 financial year was: R390 million as grants from the Department of Communiations (DoC). R220 million would be spent on compensation of employees and R109 million on good and services. Compensation of employees in terms of per cent of revenue would be 56.5% with goods and services at 28.1%. The year on year percentage indicated that there would be an increase from 17.7% in 2012/13 in the total expenditure to 42% in the 2013/14 financial year. 

ICASA spent its allocations over the previous three financial years (2009/10, 2010/11 and 2011/12) while the compensation of staff in these years was kept below 60% of the baseline allocations. Cost of goods and services as a percentage of baseline dropped from 41% to 38% and this was attributed to the cost of cutting austerity measures that were applied. With regards to projects and capital goods, ICASA adversely performed, as both trends were downward.

The Committee raised questions on the availability of spectrum engineers from technical institutions, the relocation of the headquarters, the possibility of having national broadband by 2020, setting of quarterly targets, licence fee collection, framework for the use of white spaces and cognitive technologies

 

Meeting report

The Chairperson in his introductory remarks said that Ms A Muthambi (ANC) had been hospitalised and that Ms R Morutoa (ANC) had also lost a brother.

South African Post Office (SAPO) Predetermined Objectives – 2013/14
Mr Donovan Simpson presenting on behalf of the Auditor-General of South Africa (AGSA) indicated that the presentation was a high level review that had been performed on the strategic objectives that the SAPO management had set for the financial year 2013/14 and that the objectives had not been subjected to a detailed audit that is usually done at the end of each financial year. The purpose of the review was to assess the usefulness of the information contained in SAPO’s corporate plan in terms of measurability and relevance of indicators and the measurability of targets. The AGSA had in the previous audit report of SAPO indicated that quite a number of its objectives were not clearly defined and specific to allow for an understanding of the performance against the targets.

The findings of the review were that the targets had been well defined and that there were no errors (0%) or instances were the targets were not well defined. The AGSA was also comfortable that the targets would be easily verifiable.

Mr Simpson said that there were however three items were the targets were not specific and the error rate in this case was 7%, adding that this error rate was insufficient to bring about an audit qualification. In terms of measurability of targets the error rate was 5.6% but below the rate that would call for an audit qualification. 2,8% of targets were not time bound in the sense that there were two instances were the time for achieving the targets had not been clearly defined. All the indicators and related targets were found to be relevant within the mandate of SAPO with a zero% rate of irrelevance.

In terms of the technical indicator description, the Framework for Managing Programme Performance Information required that the accounting officer to ensure the existence of documentation addressing: definitions and technical standards of all the information collected by the institution, and processes for identifying, collecting, collating, verifying and storing information. The overall conclusion was that the errors identified relating to the 2013/14 plan were below the threshold of 20% for qualification of an audit report. 

The Committee was informed that there were some overall challenges from an audit perspective that could possibly impact on the achievement of the targets such as: vacancies in some of the key positions including supply chain management, chief information officer and chief operating officer. There were incidents in prior years of non-adherence to existing policies (regulations on fruitless, wasteful and irregular expenditure). The resolution of prior year findings was another challenge that management was working to address before the final audit of the year that would be happening in two weeks. There was non-compliance with laws and regulations specifically on fruitless, wasteful and irregular expenditure – in particular, supply chain management. Weaknesses in contract management and lack of policies and procedures for performance information were the other challenges.

Speaking on the key recommendations to address the challenges, Mr Simpson said that leadership needed to understand the process to be able to guide and direct the development and implementation of proper performance planning and management practices. There was a need to have clearly defined roles and responsibilities linked to corporate plan and individual performance contracts, in addition to developing and implementing standard operating procedures. A forum had to be established for the portfolio to share insights and have a consistent approach. Continual involvement of the auditors in the planning process for performance information and the establishment and implementation of action plans to resolve prior year findings were the other recommendations.

(Please see presentation document) 

Discussion
Mr A Steyn (DA) asked for confirmation if all SAPO’s indicators had been reviewed. Low percentage on the error rate was good for SAPO but added that the key recommendations were too broad. For instance the recommendation on the development and implementation of standard operating procedures seemed to suggest that there were no procedures at all.  He sought clarity on the action plans taken by management for the resolution of prior year findings.

Mr Simpson in response said that this was not an audit but a review. The instruction from the AGSA was specific in requiring a review of the targets presented by management to find out if they met the relevant criteria. SAPO had set itself over 70 targets and each one of them was assessed by the AGSA to ensure that they were well defined, specific, verifiable, measurable, time-bound and relevant.

Mr Simpson said that there was identification of significant focus areas but that it was impossible to confirm at this stage if all these findings had been appropriately addressed – this would only be possible after the performance audit.

The standard operating procedures were specific to performance information and how members of the staff could easily understand the information to be gathered for adequate reporting.

Mr G Schneemann (ANC) in terms of the prior findings asked how many they were and the reasons that brought them about. Did SAPO have enough capacity to deal with them?  What were the reasons for the key positions being vacant?

Mr Simpson said that there were no action plans concerning addressing prior year findings. The vacant positions had contributed to some of the challenges in SAPO especially in the information technology department and supply chain management (SCM) - some of these positions were now being filled by management.  

Ms W Newhoudt-Druchen (ANC) sought clarity on the weakness in contract management.

Mr Simpson said that it had been reported in the annual report on the financial statement of SAPO that there issues around supply chain management and in particular management of contracts coming to an end to ensure swift continuity.

Ms R Morutoa (ANC) asked what had been done in terms of the errors so that one could understand if there had been any improvement.

Mr Simpson said that the targets set by SAPO had been reviewed to ensure that they were not vague when it came to reporting on them. The previous report for the year ending March 2012 indicated that 50% of the targets were not clearly defined, making it difficult for the auditors to carry out their audit function of the targets reported on in the annual report. For the few targets that had errors, the errors had not reached a threshold that would lead to a qualification following an auditing exercise.

Ms J Kilian (COPE) said that the low percentage error rating in terms of the targets of SAPO was a good thing. She asked for the non-compliance ratio (whether it was high or low) and clarity on the non-adherence to existing policies (fruitless, wasteful and irregular expenditure.)

In terms of the challenges, Mr Simpson said that irregular did not necessarily mean wasteful or that there was no value for money. The annual report gave an indication of amounts that were under investigation as potential contracts that should have been renewed that were not actually renewed on time. The annual report would give a clear indication of the conclusion of the investigations. The AGSA’s policy on fruitless and wasteful expenditure is that incurring interest on a penalty qualified as fruitless and wasteful expenditure because it could have been avoided. In prior years, fruitless and wasteful expenditure was in the areas of penalties and late payments.

SAPO Quarter 3 Performance – 31 December 2012 and Group Performance Indicators 2013/14 – 2015/16 [Scorecard] Presentations
Mr Hilmi Daniels, Acting Chairperson: South African Post Office (SAPO), in his introductory remarks and in answer to some of the issues raised during the AGSA’s presentation said that there was a procurement task force in place to monitor, regulate, evaluate and remedy any irregular expenditure in SAPO. There was a contract management policy in place and an automated contract management system was being implemented and would be active by 31 March 2014. In terms of the vacancies, the Chief Executive Officer and Chief Financial Officer vacancies had been filled and that the Chief Operating Officer had been vetted and awaiting Board confirmation. A Financial Misconduct Committee was in place to deal with issues of non-compliance with regulations and guidelines.

Mr Christopher Hlekane, Group Chief Executive Officer, giving an overview said that revenue remained a big challenge for SAPO in achieving its financial targets and the situation was worsened by the strike. Corrections had been made to facilitate SAPO’s recovery. 872 610 motor vehicle licences had been renewed during the 3rd quarter and this represented one of the products that would be relevant for SAPO’s growth. 

In terms of labour unrest, SAPO had experienced a number of incidents last year and the most recent in February. Management had assessed each one of the incidents and key challenges identified that were currently being addressed. A labour broking staff plan had been presented to the Committee and that this would be concluded in the middle of the year.

An additional 653 696 new addresses had been rolled out to date. 13 new points of presence were opened and 12 upgraded/relocated. SAPO had achieved mail delivery standard of 89% and that a Financial Misconduct Framework was being rolled out.

Ms Khumo Mzozoyana, Chief Financial Officer: SAPO, in giving a group financial overview said that in terms of the operating profit (loss) for the current financial year, there was a R156 million loss and as per the third quarter, there was a net loss of R172 million. Revenue was below the budget by R196 million but up 2% from prior year. There was revenue shortfall due to customer consolidation of volumes posted, delay in the licence approval for the Trust Centre and loss of South African Social Security Agency (SASSA) business. Expenses were below budget by R22 million but up 6% from prior year. Lower revenues and withdrawal of subsidy for marginal Post Offices contributed to higher net loss position of R173 million. For instance the subsidy for the 2012 period was R181 million while in 2013 it was R51 million.

The summary of the third quarter results for the different business segments within the Post Office Group indicated that the Post Office had an operating loss of R600 million and a net loss of R383 million. The Speed Services Couriers (SSC) revenue was R260 million, an operating profit of R110 million and a net profit of R13 million. Post Bank revenue was R484 million, operating profit of R388 million and a net profit of R212 million. The net loss for SAPO including its divisions was at R157 million. The revenue for the Courier and Freight Group (CFG) subsidiary was at R267 million with expenses at R322 million leaving an operating loss of R55 million and a net loss of R45 million. The Docex subsidiary had an operating loss of R84 million and net loss of R408 million. The total Group net loss less elimination of intercompany excesses was at R172 million.

The revenue overview indicated that the Group’s revenue streams were below budget by 4% and the prior year change up by 2%. Mail revenue was below budget due to a decline in volumes from customer consolidations and the recent strike impacts. Digital revenue was below budget because of a delay in licence approval for the Trust Centre. Concerning logistics, there was a decline in customer volumes for certain courier items. Postbank was also affected by loss of customers and the delayed implementation of bank fees. The loss of SASSA business and a decline in third party payments affected financial services while lower interest rates and cash available for investment affected interest revenue. Sundry revenue was above budget due to the insurance claim payout for the Postbank fraud.

The expenses overview indicated that staff expenses were above budget by R16 million due to additional costs incurred during strike action and conversion of casual staff. Transport expenses were above budget by R42 million due to the increase in line-haul costs for the Transnet brokerage business, increase in airline costs and transport strike. Materials and services were below budget due to cost optimisation and lower spending during December 2012. The other expenses were below budget due to cost optimisation and R20.3 million reversal for the Transman legal case that SAPO won.

With regards to staff expenses, SAPO was R33 million under budget due to critical vacant positions. SAPO was R89 million over budget to casual labour net-off with R62 million savings from flexible staff costs. There was R27 million overspending on casual labour and R17 million for overtime related to additional costs incurred during the strike action.

The Capital Expenditure indicated that out of a budget of R250 million, the actual was R79 million as payments to suppliers, R140 million was committed for purchase orders issues, a total of R219 million was utilised and R30 million was unspent from the 2012/13 budget allocation.

The cash flow statement as at 31 December 2012 revealed that the cash and cash equivalents at the end of the period of 31 March 2012 was at R3.2 billion compared to R3.5 billion for the period ending 31 December 2012. Operating activities generated cash of R550 million for the Group. (Slide 11) The balance sheet on the other hand disclosed and increased in the non-current assets by 6.5% and a decrease in the current assets by 3.9%. Equity had dropped by 6.3% while the non-current liabilities had increased by 2.3% – current liabilities had also dropped by 0.6%.  Return on assets before tax was at 1.3% by 31 December 2012 compared to 2.4% at 31 March 2012. The return on assets in terms of the net profit was a negative of 1.7% compared to 5.8% at 31 March 2012. Return on equity was 6.8% compared to 5.8% at 31 March 2012. The current ratio for the period ending 31 March 2012 was 1.29 compared to the 1.25 for the period ending December 31 December 2012.

The CFO said that the credit collection for bulk mail debtors was 17 days, 40 days for Speed, 10 days for Agency, 30 days for Hybrid, 50 for Courier and a Group total of 32. Bulk mail debtors had exceeded target by five due to low debt collections, Speed days were 11 above target due to late payments from customers, Agency debtors days were high due to the Cash Paymaster Services (CPS) matter currently in litigation, Courier days were three days over the benchmark due to low debt collections but on the whole, the overall collection from debtors was within the target.  

In terms of the scorecard and in particular the measurement of Economic Performance Indicators, the third quarter target of 5.6% on top of declared revenue for 2011/12 for the Group revenue growth was partially achieved with 1.6%. The target of achieving Group operating profit of R18 million was not achieved with a negative of R156 million. Maintaining Group total cost as percentage of total income by 99.6% was partially achieved with an actual 103.6%. The target of growing Postbank non-interest revenue by R14 million was not achieved however, the target of growing Postbank depositors book by R190 million was achieved by R219 million. Return on asset was not achieved and the same applied to the expected return on equity of 2.3%. The targeted increase of total assets by R10.314 billion was partially achieved by R10.195 billion while the current ratio target of 1 was achieved by 1.25. Debtors days in terms of mail were not achieved while debtors days for courier were achieved by 53. The target of R187 million capital expenditure spend (paid and committed was achieved by R220 million.

Ms Marietjie Lancaster, Group Executive Strategy and Acting Chief Information Officer speaking on the non-financial performance indicators said that there was an annual objective of business restructuring and the improvement priority of corporatisation of Postbank included the completion of the company registration process. In the third quarter the Postbank Board of Directors was appointed while the lending, borrowing and investment policies had been approved by the Department of Communications, National Treasury, the Minister and Cabinet.

Reviewing and implementation of shared services units required the preparation of all the necessary plans and commencement with the preparation of business cases for approval in accordance with the approved Group structure. The third quarter achievement was that conceptual level two and logical level three process design for contracts management was completed but the priority had not been fully achieved. In terms of consolidating the road transport network that involved commencement of national line-haul tender for truck tractors and drivers, and for the procurement of trailers had been achieved with the legal department finalising contracts for successful bidders – the expected completion was 1 April 2013.

The Speed Services integration into Logistics priority that involved National Treasury’s resale of significant assets as per the requirements had not been achieved because SAPO was still awaiting feedback from the Minister following the submission of information regarding the salary impact and the grades affected. The third quarter target of 5% reduction of workplace accidents on previous year’s actual 363 incidents, this was not achieved as there was a 2.8% increase (10 incidents). The 1.6% third quarter target in terms of the training expenditure as percentage of group staff budget was not achieved partially achieved by 1.08%.

In terms of maintaining and enhancing talent management, all general managers trained in the development board process to support the roll-out to Senior Manager level. General Managers’ workshops were held during October and November 2012 while talent forums were scheduled for end of January 2013. The 10% target reduction on previous year’s actual of R141 million (management of human resource liabilities) was not achieved, as there was an increase by 41% to R199 million largely due to 8 128 contract workers appointed. However, the targeted 10% reduction on the previous year’s actual of R1.5 million (housing liability) was reduced by 6.6% to R1.4 million.

On the health perspective and specifically encouraging employee participation in the voluntary HIV/AIDS testing, the target of 80% of total staff participation had been partially achieved 77% of staff participating. On the access to ICT services, the targeted approval of e-Strategy Framework by the executive committee and commencement of formulation of the request for proposal and specifications for the e-Strategy were partially achieved in the sense that the technical specifications and evaluation criteria for e-registered mail were approved by the Procurement Committee. The request for proposal was to be advertised during the January/February 2013. There was an implementation of the Trust Centre Traffic fine online payments and the Postbank SMS balance enquiry.

The target of developing a framework of customer intelligence hub in the third quarter was not achieved, as there was current scoping of the Marketing Intelligence system relevant for the organisation’s requirements. The preparation of Customer Relationship Management (CRM) case and submission for approval had not been achieved because it was still in progress.

In terms of the licence and mandate obligations, the additional provision of physical addresses was partially achieved. Only 720 226 had been achieved as at 31 January 2013 with the financial year target of 1 195 690 expected to be achieved by 31 March 2013.  The target of establishing 38 additional retail outlets (points of presence) was partially achieved with only 13 established. The total of 40 new outlets would be achieved as at 31 March 2013 against the set target of 50 outlets.

There was a partial achievement in the mail delivery standards, by 89% of the set mail target of 95%. The current industrial actions were expected to have a negative impact. The logistics target of 98% could not be achieved due to delays in South African Airways flights and the availability of trucks – only 88% had been achieved. Reduction of queue waiting time to seven minutes in accordance with customer care standards was partially achieved with 96% of branches complying.

Ms Lancaster on the ethics said that the target of establishing of a financial misconduct committee to deal with financial misconduct, irregular expenditure, fruitless and wasteful expenditure had not been achieved; however, information had been gathered for the drafting of a report. Executive Committee governance forums were being held on a quarterly basis. The targeted achievement of a 10% increase on previous year’s 136 actual number of calls received (anonymous crime reporting) was not achieved as there was instead a decrease by 4% of the calls to 131. 10% reduction of crime and fraud on previous year’s 2218 actual number incidents was achieved by 23%, which translated into a reduction, by 500 incidents.

The audit issues were categorised into three classes: red audits (critical), yellow audits (significant), and green audits (low). Their third quarter target was to achieve 10% of the red audit issues, 30% of the yellow audit issues and 60% of the green audit issues. However, only 24% of the targeted 10% of the red audit issues had been achieved, 60% for the yellow audits and 16% for the green audits. In resolving all the audit issues, 52 were still outstanding out of a total of 192.

With regards to transformation and specifically on employment equity, there was need to correct the balance however the total Broad-Based Black Economic Empowerment spend had been achieved by 62.2%. Reduction of total water consumption by 3% over prior year actual consumption was not achieved due to ongoing discussions of designing new SAPO buildings with the grey water catchment areas between sustainability and architects.  In terms of the summary, there were 35 improvement areas, 55 key performance indicators, 18 had been achieved, and 14 were partially achieved while 23 were not achieved.

The Group CEO said that Post Bank was one of the key projects that SAPO was focusing on. There was a re-alignment of plans against the funding received.

 

Mr Keaobaka Ramantsi, General Manager: Postbank, said that because of the funding, SAPO had to look at prioritising in order to meet the target of the mandate. Consideration was being placed on processes and getting the right systems in place in order to provide sustainability. Since Postbank was operating under the Banks Act, it was looking at bringing on board about 100 people within the next twelve months.

(Please see presentation documents)

Discussion
Ms J Kilian (COPE) was concerned that some issues that had been raised by the Committee in past years concerning the Postbank had not been addressed. The National Treasury also expressed concerns and made recommendations that were also not taken on board. Based on the current situation of Postbank, Parliament could be accused of passing a legislation that it did not fully address its mind to. The business model of SAPO indicated that there was declining subsidy and increased competition. It was time for SAPO to consider some of the business segments to see if some were going profitable. It appeared that some such as Docex were not as profitable as had been anticipated. Postbank’s business model was on the other hand profitable.

What were the components of other expenses under the expenses overview? There was also concern on the fringe benefit expenses that were increasing instead of declining. More clarity on the debtors was needed. Why were South African Airways delays under logistics anticipated to create contingency measures? The resolution of audit issues from previous years was taking long and if the vacant positions were part of the unresolved issues, why had they not been filled to address financial management and control issues? What was SAPO paying for the Independent Communications Authority of South Africa (ICASA) licence?

Ms Newhoudt-Druchen asked what was measures were in place to achieve the remaining 11% of mail delivery. More details were required on the number of permanent staff and casual staff and their salaries. Maintaining Group staff cost as a percentage of total income showed an achievement of 56.3% from the targeted 55.7% – why was the achieved status showing partially achieved. The same applied to maintaining Group total cost as a percentage of total income that indicated partially achieved where the target for the third quarter was 99.6% and 103.6% had been achieved. In terms of transformation and disability, SAPO had been encouraged to contact the Deputy Minister in the Department of Women, Children and People with Disabilities to assist SAPO in achieving the target on disabilities within the Group.

Ms R Lesoma (ANC) said that partially achieved was not the same as achieved. Why was SAPO setting targets that could not be achieved within the set time?  What is the difference between permanent staff salaries and flexible staff expense? What were the measures in place to address the issue of disabilities? In terms of work force stability how was labour unrest being addressed?

Mr Schneemann asked how SAPO was going to change the ‘gloomy picture’ by the end of March 2014 - it was a ‘worrying situation’. Some post office outlets in certain areas had been closed. The failure to meet the disabilities employment target was partly blamed on the condition of the buildings that were not accessible. Why was this taking so long to address? Licence renewal service was faster at the Post Office than at the licence renewal office where there are long queues. What was being done to expand the services offered by SAPO?

Mr Steyn expressed his condolences to Ms R Morutoa (ANC) and the family for the loss of her brother. In terms the 89% mail delivery achievement, this was taken with ‘a pinch of salt.’ How was this measured in light of the ongoing strikes? The digital revenue was below budget due to a delay in licence approval for Trust Centre – what was this Trust Centre? How was the R216 million actual loss to be funded? More clarity was needed on the casual and flexible staff costs (it is hoped that the workers on strike were not paid and so SAPO ought to have saved some money)?

It was unfair to blame the non-achievement of the targeted 10% reduction on previous year’s actual of R141 million (leave liability) on the new contract workers considering that their leave was negligible. Going back to mail delivery and the current industrial actions that had would have a negative impact, he said that both the Minister and SAPO were not proactive in communicating to the public at large. There was a potential strike in Cape Town and yet SAPO had not taken a proactive role to address this. How was the reduction of crime measured? He suggested that there should also be more stress on the most critical audit issues as opposed to the green audit issues.

Ms M Shinn (DA) asked as to how much the strikes had cost SAPO. There was a possibility of the strikes putting SAPO out of business and since SAPO (it is possible that SAPO would not survive the following year) did not have a sustainable business model, a request for a bail out would not come as a surprise.

Ms Morutoa wanted an elaboration on the ICT Access alignment with the ICT infrastructure roll-out and considering that some post office outlets looked like warehouses.

The Group CEO in response to the questions raised by the Committee said some of the issues would be answered in the presentation on the Group overview strategy. He however said that the strikes had negatively impacted the level of recovery of SAPO with the net profit declining. From a historical perspective, the subsidy had had a bearing on the net profit from 2008 but its steady withdrawal meant that SAPO had to work out a way of being more profitable. The projected forecast of the net profit for 2013 was a net loss of R272.5 million against a budgeted net profit of R59 million. The impact of the strikes on the revenue was R35 million in 2012. SAPO was looking at all business units with a view of determining how to turn around units like CFG in trying to get them in a more profitable position.

The Group CEO said that SAPO would be providing figures of the detailed expenses to the Committee. In terms of mail delivery, SAPO would not recover from the 11% and this remained a challenge in light of the strike action. Resolving the issues on disabilities included dissolving many SAPO buildings so that the new buildings can be accessed by people with disabilities. He also said that transformation should be broader than just employees Achieving 100% on staff participation on HIV testing was not possible and so SAPO was being realistic in so a target of 77% was more realistic and achievable.

With regards to communication with public and the level of challenges together with the Department of Communications (DoC), SAPO was trying to ensure that deal with the operational issues and then update the DoC. There were internal policies on how to handle the customer care account and SAPO was indeed engaging with the public although it could do better - SAPO was communicating with the public in terms of its recovery.

Speaking on the design of the post offices, he said that SAPO was trying to focus on the new post offices in line with the budget allocated for recovery and growth. SAPO was looking at alternative funding models for the post offices given the financial constraints. On another note SAPO had engaged and would continue to engage with ICASA concerning the licence in terms of control.

The Acting Chairperson of SAPO said that most of the audit issues related to ICT and procurement matters. The SAPO Board had created a separate procurement task team to deal with the some of the audit issues such as expired contracts, those that are about to expire in line with procurement policies to ensure that there is compliance.

The Chairperson said that it was not about setting up structures but rather the implementation. How was SAPO ensuring that the policies were implemented? The Acting Chairperson in response said that the reason for setting up the task team was to monitor the compliance and monitoring of policies. The ICT problem revolved around the software platform. It would require R800 million to replace the ICT infrastructure but SAPO currently had about R200 million for this year. The Board was responding constructively in terms of remedying the audit queries. Other audit queries were being addressed by the audit committee, risk committee and the financial misconduct committee that was addresses issues around irregular, fruitless and wasteful expenditure.

The CFO said that the ‘other expenses’ included costs like communication, marketing, telephone – more details were to be sent through to the Committee on how much each cost. Fringe benefits consisted of pension contribution and medical benefits towards the current staff.  In terms of the impact of the strike, the ‘no work no pay’ principle was not applied due to a high level of intimidation from some workers. Assistance had to be brought on board accounting for the overtime expense.

The losses would be funded through the accrual basis accounting model that SAPO was running that would cover the losses through absorption as opposed to the cash basis model of accounting. SAPO had retained earnings of R1.4 billion and so the loss of R132 million would be absorbed within the retained earnings, explaining a drop in SAPO’s equity.

Labour was classified into different categories to monitor its movement. Permanent staff were those on fixed term contracts while long term contractors related to information technology (IT) consultants and support – people that SAPO could not attract internally hence having to sub contract them.
 

Mr Lungile Lose, Group Executive, speaking on the motor vehicle licences said that the outlets were the service was being offered was currently at 30% and this service was in five provinces out of the nine (SAPO outlets). There was an expected launch of the service in the Northern Cape in the next few weeks. With regards to ‘Trust Centre’ he said that this is what authenticates communication between over the internet. SAPO was responsible for issuing authentication certificates. The launch would be done in about two months.

Mr Igsaan Adams, General Manager: Logistics, responding to the issue of South African Airways Cargo (SAA Cargo) and its impact said that October, November and December were high volume periods for courier. For the period October to November 2012, SAA Cargo had one of its worst periods in terms of delays due to technical issues on some of the aircraft that needed replacing. The replacements were not happening promptly due to a number of challenges. SAPO had diverted some volume to passenger flights to try and ensure that delays are reduced. Alternative suppliers on the various air routes were also being engaged.

SAPO Group Overview: Strategy (Corporate Plan) 2013/16 & Annual Performance Plan 2013/14 

Mr Hlekane said that mail continued to be the biggest contributor but there was also a need to identify other products that would contribute to the growth of the Group. Technology evolution would be key in forcing innovation.  SAPO also needed to be agile enough to meet its various mandates. In terms of financial and other business-related activities, there was need to look at the business model to ensure that the business is self-reliant and self-sustainable without having to rely on subsidies.

Technology was being embraced to deliver services more efficiently to SAPO customers in addition to the need for people to be accountable in the delivery of services. The drive was also towards a single minded and focused delivery of the defined programs of work. SAPO was also looking at investing in SAPO staff to enable them deliver the strategy and that the strategy would provide a road map for diversification. There was an intention to deliver value to shareholder and SAPO’s other stakeholders.

SAPO was going to focus on six focus areas to bring about an efficient sustainable business that was well defined and well communicated to the public, invest in people and also take them along in terms of building capacity for the future. Business operations would be aligned to customers’ needs, fostering good governance though review of internal policies. There would also be a focus on renewing and designing a physical network for the future as well as innovation with new products and services.

The plan included key programs such as crime prevention, improved communication, cost optimisation, technology infrastructure renewal, Postbank corporatisation, supporting government imperatives, revenue generation. The result would be a sustainable business providing economic opportunity to all South Africans, a great place to work that would also attract skilled people, become a partner of choice for government, business and citizens, satisfactory service delivery that would delight customers. The focus areas and key programs would also result in products and services meeting customer needs, a competitive and high performance culture; and meeting the shareholder mandate.

In terms of the business units, the Group CEO said that property was one of the areas that presented an opportunity for growth and that other products would also be considered to see how much they would contribute to growth. Although the operating principles had not changed, there was need to look into the yearly licence fee paid to ICASA.

The effect of industry issues and in particular on customers, there were alternative/substitute products, services and channels that provided customers with more options. The substitute products like the growth of e-communication and services were also a challenge but customers had a tendency of being loyal to big brands and SAPO was a big brand too. SAPO had to look at its business model and to identify where the opportunities lay. The on how SAPO structuring was done was a matter that was being handled by the Board.

Speaking on the Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis he said that in terms of the strengths it was not about talking about the number of outlets or the geographic cover since some of the SAPO products were not ‘bricks and mortar’ in terms of design and delivery. Some of the weaknesses were legacy challenges such as the possible infrastructure readiness to support innovation and operational excellence; and the lack of agility due to protracted decision-making processes but there was also in the implementation of policies. The high fixed costs were also a challenge in that they affected the rate of change for the business as a whole.

The Group CEO said that concerning the international postal trends, one of the areas was optimisation with an aim of maximising the efficiency and effectiveness of existing processes, systems and performance systems. Innovation as an international postal trend would bring about the introduction of new products and services designed to respond to the needs of a service demanding market. Diversification would allow for SAPO entering new lines of business through investment in new capabilities, partnerships and acquisitions. AS part of the globalisation drive, SAPO had to expand and capture business opportunities beyond South Africa’s borders.

South Africa’s position in terms of benchmarking with international postal operators in which various elements were rated individually and scored in terms of overall performance had increased by one from 18 to 17 with the USA, Japan, South Korea and Australia leading the way. The licence agreement was the benchmark in measuring the delivery of targets such as frequency of collection and delivery, delivery point rollout, quality of service for mail items and customer care. However, delivery of 50 access points would remain a challenge owing to a number of factors. 

SAPO’s five year strategy from 2013 to 2017 was product centric covering courier, mail, retail, financial services and digital certificates; and in terms of being solution and customer centric, it would cover integrated logistics solutions, communication solutions, one-stop solutions, digital solutions and real estate solutions. The core competence would look at physical delivery network, digital and the property portfolio.

The critical success factors for SAPO would see a focus on people, process and systems. In terms of people, there would be an implementation of an effective Performance Management and Monitoring system, an appropriate skills mix to drive the strategic intent, reward and recognition as well as succession planning.

Ms Lancaster speaking on SAPO’s strategic objectives said that these had been aligned with some of the Department of Communication’s (DoC) strategic goals and objectives. DoC’s second strategic goal was to ensure that the ICT infrastructure is accessible, robust, reliable, affordable and secure to meet the needs of the country and its people. The relevant objective was supporting and enabling the provision of a multiplicity of ICT applications and services through facilitating the modernisation and deployment of the infrastructure. As a way of making a proper alignment, SAPO had come up with a strategic theme of renewing and designing a physical network for the future and a drive to innovate with new products and services. The strategic goal would see a provision of secure, efficient and integrated infrastructure for better responsiveness to stakeholders and the expected deliverables were: improvement of physical condition of SAPO buildings, improvement in uptime and availability of IT infrastructure systems, reduction of postal violent crime incidences; and delivery of set top boxes to consumers as part of the National Broadcasters digital change over.  The additional theme in support of the DoC second objective was the alignment of business operations to customer needs, shareholder priorities and government priorities with a deliverable of improved accessibility and provision of addresses to citizens.

In terms of DoC’s third strategic goal of accelerating the socio economic development of South Africans and facilitating the building of an inclusive information society through partnerships with business civil society and three spheres of government; and the accompanying strategic objective of increasing E-skills and uptake and usage of ICT, SAPO’s expected deliverable was to bridge the digital divide gap through the E-Rural Access via digital solutions. DoC’s fifth strategic objective of contributing to the global ICT agenda prioritising Africa’s development would be supported through SAPO’s strategic theme of aligning business operations to customer needs, shareholder priorities and government priorities with the expected deliverable of ensuring that SADC Money transfer services are implemented in targeted countries. Implementation of these services had already been done in Lesotho and implementation in Mozambique was in progress.

DoC’s first strategic goal of maintaining good corporate governance principle to continuously improve as a trusted corporate citizen would be supported through SAPO’s strategic theme of reviewing internal policies to foster good governance, streamlining of processes and the enhancement of efficient decision making with expected deliverable of promoting clean audit findings and reduction of residual risk profile. DoC’s third goal of investing in people through building of capacity and implementation of transformation programmes would see SAPO deliver on the reduction of injuries on duty, advancement of historically disadvantaged individuals (HDIs) and women in workplace; and the integration of people with disabilities in the workplace.

In terms of DoC’s sixth strategic goal of remaining environmentally conscious through promotion of green practices, SAPO would be expected to deliver on the reduction of emissions through carbon management, reduction in energy and water consumption, and reduction in paper usage.

Ms Mzozoyana speaking about the financial plan said that SAPO was anticipating a loss of R80.3 million for the 2013/14 financial year and a loss of R29.5 million for the 2014/15 financial year. There would however be a turnaround in 2015/16 with a profit of R10.5 million, a profit of R64 million in 2016/17 and a profit of R80 million in 2017/18.

The forecast balance sheet for 2013 would see total assets at R10.2billion, total liabilities at R7.7 billion, equity at R2.5 billion and total equity and liability at R10.2 billion. In 2014 total assets were forecast at R10.5billion, total liabilities at R7.8 billion, equity at R2.6 billion and total equity and liability at R10.5 billion; 2015 total assets forecast at R10.6 billion, total liabilities at R7.9 billion, equity at R2.6 billion and total equity and liabilities at R10.6 billion. Total assets for 2016 were forecast at R10.8 billion, total liabilities at R8.1 billion, and equity at R2.6 billion with total equity and liabilities at R10.8 billion. Total assets for 2017 were forecast at R11.1 billion, total liabilities at R8.4 billion, and equity at R2.7 billion with total equity and liabilities at R11.1 billion. Total assets for 2018 were forecast at R11.5 billion, total liabilities at R8.7 billion, and equity at R2.8 billion with total equity and liabilities at R11.5 billion.

The forecast cash flow for cash and cash equivalents would see 2.2 billion in 2014, R1.6 billion in 2015, R1.1 billion in 2016, R1 trillion in 2017 and R862 million in 2018. With regards to the capital expenditure funding requirements forecast, R1.8 billion would be required in 2013, R904 million in 2015, R1.9 billion in 2016 bringing to total forecast Group funding requirements to R4.6 billion. The forecast Postbank funding including capital adequacy requirements were; R1.2 billion for 2014, R276 million in 2015 and R1.5 billion in 2016, with a forecast total of R 3 billion.

The Committee was informed that if SAPO continued in its current form without taking any initiatives it was envisaged that in 2013 it would incur a loss of R272.5 million, a loss of R289.3 million in 2013, a loss of R333 million in 2015, a loss of R428.9 million in 2016, a loss of R572.2 million in 2017 and a loss of R735.2 million in 2018. The absence of subsides would affect the net profit of SAPO over the year if no steps were taken as no subsidy was expected from March 2014 through to March 2018. However interventions would see SAPO recover from March 2016 with a projected net profit of R10.6 million and this would increase in March 2018 to R80 million. SAPO’s cost structure revealed that the operating costs were forecast to outpace revenue from 2013 until 2016 and this was in the areas of employee benefits, transport, property and other expenses. With initiatives that would bring about cost optimisation, SAPO would come out better by R104 million than the projected initial loss of R272 million. The Postbank fraud claim that was settled and the Telkom consolidation benefits brought a further value of R32 million.

The CFO said that concerning the Universal Services Obligations network, the 2013 profitability revealed that the revenue generated would be R73.2 million against the operating cost of running the services of R473.2 million translating into a loss of R399.9 million. This meant that the 629 post offices located in the previously under-serviced areas needed to be subsidised through a model that would assist in addressing this concern.

The projected Net Profit for Postbank projected a net profit of R139 million in March 2013, R10 million in March 2014, a loss of R141 million in March 2015, a loss of R128 million in March 2016, a loss of R102 million in March 2017 and a loss of R89 million in March 2018. These loses were attributed to the corporatisation process that included setting up of infrastructure. CFG would see a loss of R51.1 million in March 2013, a loss of R42.5 million in March 2014, a loss of R26.2 million in March 2015 with a turnaround of a net profit of R0.7 million in March 2016, a net profit of R40.8 million in March 2017; and a net profit of R97.1 million in March 2018.

The CFO said that in terms of revenue generation the Post Office with the exclusion of Postbank and CFG would generate well by making a loss of R47.9 million in March 2014 but then having a turnaround and generating a net profit of R137.6 million, R138.6 million, R206.9 million and R266.1 million in the years March 2015, 2016, 2017 and 2018 respectively. 

The Group CEO said that at the time of preparing the financials, there was no confirmation of funding for Postbank but with the confirmation, the picture of Postbank would change as this would enable it to put its systems in place together with bringing more staff on board. The postal services sector despite the slight decline remained a big contributor in terms of generating revenue.

Ms Lancaster speaking on the annual scorecard said that SAPO had a business balance scorecard in place that spelt out a strategic goal and annual target and the quarterly targets to help in tracking the performance – this showed the level of commitment by SAPO in meeting the set targets for each year. The Human Resource Plan would see a focus on the complete human capital investment and a focus on disability and women to bring about employment equity. SAPO had developed a communication plan with four specific goals on how to improve communication in the year ahead.

SAPO had with regards to fraud prevention developed a comprehensive plan covering: fraud and corruption strategies including controls and detection, governance committee, employee awareness, pre-employee screening, recruitment procedures, internal audit, declaration of interest and disciplinary processes. The SAPO’s Corporate Social Investment plan included E-Rural Access that would see investment in the area of digital inclusion in partnership with the Department of Rural Development and Land Affairs. The green strategy/environmental plan would focus on replacement of scooters with environmentally friendly scooters, energy saving globes, cans/glass and plastic recycling as well as paper and cartridge recycling initiatives. 

SAPO’s governance model in terms of accountability involved internal stakeholders such as the shareholder, the board, board committees and external stakeholders such as Department of Communications, Labour, customers, suppliers, employees and the Parliamentary Portfolio Committee.

The Group CEO speaking on the risk dashboard said that inadequate IT infrastructure to support business processes and insufficient revenue growth were very high-risk areas adding that the control rating was weak. The high operational cost increases and poor condition of building infrastructure were high-risk areas with very high residual risk.

Discussion

Mr C Kekana (ANC) wondered why SAPO was still debating the issue of cross subsidisation – it was high time that SAPO focused on developing a clear strategy that would make it self-sustaining while generating enough revenue.

Mr Steyn referring to the projected financial statement asked about further interventions to be undertaken other than cost saving and the basis for the projections.

Ms Shinn asked for clarity on the online uptime target? What was happening with the set top boxes? With regards to universal services obligations it was unrealistic for SAPO to be burdened with its financial obligations if it was not making any profit. If the government was interested in it, it should finance it. With the rolling out of infrastructure a high-risk area requiring R800 million over a period of three years, what was SAPO’s strategy? What was SAPO’s internal crime rate? Was the design for digitisation going to be ready in June, what did it entail and would it be affected by the amendment?

Ms Morutoa asked for the impact of courier on the SAPO financials.

Ms Kilian in terms of the dramatic turnaround that SAPO was expecting as reflected in its net profit slides said that there were challenges in succession management and that a lot had to be done to achieve the projected revenue generation. More definitive information was needed to have a proper turnaround.

The Chairperson asked how long SAPO was going to exist in terms of sustainability.

The Group CEO in response to the questions said that SAPO would provide the required details concerning the major initiatives to be undertaken besides cost saving. With regards to subsidisation, he said that SAPO would not subsidise Postbank to a level that would be considered by other competitors as unfair competition.  SAPO would be getting back to the Committee with details of internal crime rate. The Impact of courier on the SAPO finances could be determined at the end of the financial year.

Ms Lancaster addressing the issue on the online uptime target said that SAPO was currently online but there was a move to upgrade that might be done by the end of the year. Uptime could not be guaranteed because there was only one data centre in case of repairs. A second data centre would allow for switching while repairs are being carried out.

Concerning the set top boxes, she said that SAPO’s internal decision was to continue with the development of set top boxes and this would be completed by June 2013. Logistics had been sorted out and the warehouses secured - workshops had also been carried out. In terms of the costs spent on Postbank DoC would reimburse SAPO.

Mr Ramantsi said that the readiness of Postbank depended on the application made to the regulator and the passing of the legislative amendment by Parliament. There was ongoing work on the alignment of shareholder responsibility, job profiles, product reviews with a countdown scheduled for June 2013.

The Chairperson wondered if the countdown would commence upon the amendment of the Act or if it included the process of amendment and compliance with all the necessary requirements.

Ms Kilian said that the June 2013 time period for Postbank was unrealistic especially with regards to the legislative amendment.

Ms Deon Louw, Commercial Specialist: SAPO speaking on the crime said that this was internal and external. Internal included theft and pilfering of mail and parcel items by staff in these sections, inflated balances (Postbank) and password breaches, corruption and other financial misconduct. Externally, the crimes included cash in transit, heists, hijacking, armed robberies and cyber-crime, the use of post boxes for drug trafficking and arson in cases of labour unrest.

The Group CEO on giving an update on the strikes said that this lasted six weeks. The strike was illegal and based on false allegations of money being owed to workers. 588 employees were on strike and SAPO had to go through all the right procedures in resolving the matter including mediation that took long. There was no formal procedure for the strike and the employees on strike did not want representation by the unions making it difficult to engage with them. SAPO had to terminate the employment contracts of those on strike. Congress of South African Trade Unions had since been involved to investigate the matter. The demonstration and strike that took place on April 15 was by temporary staff but a compromise had been reached at which the employees would report back to work while negotiations continued.

The Chairperson said that there was need for an investigative report on the causes of the strike so that those that had participated in inciting them are exposed. This would enable SAPO to effectively deal with the matter. It was possible that some of those that had incited the strikes were not even affected by the terminations because they did not actively participate.  

Ms Kilian said that SAPO mostly relied on labour courts. There was need to identify the source of the reports on the moneys owed – some workers were victims of intimidation. This would end up crippling the business of SAPO.

Ms Morutoa asked how far the interaction with the shareholders had gone.

Ms Lesoma (ANC) wanted details on the shareholders of SAPO.

The Group CEO said that SAPO was at the end of filling up the vacant positions especially most of the senior management. Details of the funded vacancies were not available at present.

Independent Communications Authority of South Africa (ICASA) Strategic Plan 2013/18

Mr Themba Dlamini, Chief Executive Officer: ICASA said that the presentation would focus on the 2012-2013 eight strategic goals, the strategic priorities, council strategic thrust, the re-clustered five new strategic outcome oriented goals (SOOGs), mapping of the 2014-2018 SOOGs to the Department of Communications’ strategic goals, the reasons for re-clustering, the five strategic goals and objective: 2013-14 targets; and the risks in achieving the strategic goals.

ICASA had to consider the eight 2012-13 strategic goals that included ensuring effective participation by historically disadvantaged individuals in the industry, ensuring the provision of broadband services, optimisation of the use of radio frequency spectrum to support the widest variety of services with a view of determining if there were enough financial resources to achieve them within a particular time.

ICASA had assessed its performance in relation to targets set, the budget allocation received and the demand of the industry together with government imperatives and as a result, the strategic priorities had to be revisited in line with the National Development Plan (NDP). The identified strategic objectives were the promotion of competition and participation, broadband, consumer centrism, Universal Services and Access and the Modernisation of ICASA.

Preliminary discussion

The Chairperson reminded the CEO that at the previous presentation on ICASA’s third quarter performance, there was an unresolved issue on the strategic predetermined objectives that the Committee sought clarification on.

Ms R Morutoa (ANC) said that from a procedural point of view it was not logical to proceed with the strategic plan while there was a pending clarification on the third quarter to be made.

The Committee was informed by Councillor Marcia Socikwa: Engineering and Technology that besides the documented dated 27 March 2013 entitled ‘‘Independent Communications Authority of South Africa: Q3 Performance Report, Strategic Plan 2014-2018 and Budget 2013/14’, another document had been prepared entitled ‘Independent Communications Authority of South Africa: Q3 Performance Report – April 2013’ with adjustments to give more details on the quarter three performance.

Ms Kilian said that what would help would be going back to the quarter three document dated 27 March 2013 and if case of any supplementary information reference would then be made to the April 2013 document. It would create a problem as to which document would be reflected in the record of Parliament, as it was not clear if the April 2013 document was replacing the 27 March 2013 and if so, the reasons for the replacement.

Councillor Socikwa said that the April 2013 document was supplementary as it explained the slides that the Committee wanted clarification on in explaining the numbers in a simpler way.

Ms S Tsebe (ANC) proposed that ICASA should present continuing from where they stopped using the March 2013 document and in case of any addition; they would refer to the April 2013 document.

Mr Steyn said that whereas the document presented in 27 March 2013 had four out of five goals that had not been achieved by the third quarter, the supplementary document only addressed two goals (consumer protection and bridging the digital divide).

Ms Kilian said that ICASA had to prepare like other entities that appeared before the Committee to enable it (the Committee) to perform its oversight role. It was on that basis that the Committee insisted on the provision of certain clarification and information. There was also a disjuncture between those presenting because they perhaps had not expected to present on the third quarter. 

Mr Kekana said that ICASA should resort to a more user-friendly language instead of using complicated terminology that was complicating matters, as more questions would be asked for clarity.

Ms Shinn said that there was confusion in the strategic objectives and the targets/output.

Ms Morutoa said that the alleged supplementary was different and that the Committee was just wasting its time.

The Chairperson in guiding the Committee said that ICASA should proceed with the strategic plan and they proceed with a presentation of a reworked document indicating the achieved targets in quarter three and those that were not achieved and the reasons.

ICASA briefing continued

The CEO continuing with the strategic plan said that the strategic thrust identified by Council that would be prioritised for 2013-14 were: competition, cost to communicated ad cost of services, consumers (including education, quality of service and ADSL download speeds) – this would be fall under strategic outcome oriented goal (SOOG) 1 and 4. Broadband access (local loop unbundling and coordination of fibre roll-out), regulatory framework and the role of postal services would fall under the new SOOG 2 just like broadcasting services, regulatory review and DTT. Optimisation of spectrum would fall under the new SOOG 3 while the strengthening of ICASA in terms of enforcement and compliance, capacity and legislative review would be under the new SOOG 5.

ICASA re-clustered five new SOOGs (promotion of competition, promotion of digital agenda, promotion of efficient use of spectrum resources, protection of consumers and modernisation of ICASA) mainly due to allocation of resources that ICASA was getting from the Department of Communications. ICASA new SOOGs had been mapped to DoC strategic goals. For instance, ICASA’s SOOG1 on promotion of competition was aligned to DoC strategic goal1 of competitiveness and economic growth of the industry; ICASA SOOG 2 on promotion of the digital agenda and SOOG 3 on the promotion of efficient use of spectrum and numbering resources were aligned to DoC strategic objective 2 on accessibility, reliability and affordability of secured ICT infrastructure; ICASA SOOG 4 on protection of consumers was aligned to DoC strategic goal 3 on building of an inclusive information society; ICASA SOOG 5 on modernising ICASA was aligned to DoC strategic goal 4 on performance of DoC strategic goal 4 on performance of DoC and ICT state owned companies while DoC strategic goal 5 on contribution to global ICT agenda was linked to ICASA’s SOOGs 1, 2 and 3.

The CEO said that the reasons for re-clustering were to: ensure the integration between ICASA programmes, reduce the scope of work and number of targets reported at high level, ensure that the scope of work and deliverables were within budget allocation where baseline reductions were required; and constrain related to technical competencies to deliver on ICASA’s statutory obligations.

The five strategic goals and their respective objectives were: promotion of competition whose objectives included removal of bottlenecks to competition, ensuring that South Africa retail prices of ICT services fairly reflected costs and ensuring effective historically disadvantaged individuals and black economic empowerment participation in the sector; promotion of the digital agenda would see the facilitation of nation-wide broadband penetration by 2010 and the promotion of the development of public, community and commercial broadcasting services in the context of digital migration; promotion of efficient use of spectrum resources would lead to the establishment of innovative approaches to technology usage and support of the rapid uptake of new ICT technologies; protection of consumers would ensure the promotion of consumer rights and universal service and access; and the modernisation of ICASA would lead to an improvement in the operational processes and performance.

In terms of risks that would affect the achievement of strategic goals, the CEO said that the risk associated with promotion of competition was the litigation by the industry challenging the outcome of regulatory processes. ICASA would mitigate this through adherence to proper processes and procedures in terms of the Act and existing regulations. The other risk was the inconsistencies of the application of the historically disadvantaged individuals and black economic empowerment due to an incomplete National Framework on Employment Equity. ICASA would mitigate this through the development of a Memorandum of Understanding with the Department of Trade and Industry to coordinate the Black Economic Empowerment framework for the ICT Sector.

Promotion of the digital agenda was faced with a risk of national spectrum policy vacuum that could be mitigated through ICASA’s increased dialogue with the Minister. The incomplete broadband policy risk would be mitigated through provision of additional recommendations to the Minister. The uncoordinated municipal approach to rapid deployment of networks would be mitigated through ICASA assisting the DoC with the development of a rapid deployment framework while the risk of the DoC’s failure to complete the efforts of an ICT policy and the uncertainty it would create of the roles and responsibilities to be played by all stakeholders would be mitigated through ICASA’s provision of input to the processes of the DoC as and when possible.

The promotion of efficient use of spectrum and numbering resources was faced with a risk of uncoordinated effort to manage the import of ICT devices, a risk that would be mitigated through setting up of memoranda of understanding with relevant institutions. The risk of poor attendance by customers to advocacy programmes that would hinder the achievement of the objective on protection of consumers would be mitigated by strengthening the relationship with external stakeholders.

The risk of uncertainty of roles and responsibilities of ICASA owing to the Electronic Communications Act and the ICASA Amendment Bills that would affect the modernisation of ICASA would be mitigated through ICASA’s participation in the public hearings and provision of written commentary on the proposed amendment to the legislation.

The CEO added that the overall lack of funding had an effect on a number of aspects such as: the availability of end-to-end spectrum management software, lack of state of the art broadcasting monitoring equipment, organisational restructuring and the need for change management, not having optimal funding for skills development and recruitment, capacity to perform monitoring to ensure quality of communication services. There were also delays in migration of terrestrial broadcasting from analogue to digital.

Ms Clarinda Simpson, CFO: ICASA said that in terms of the financial performance and funding, the expenditure estimate for the 2013/14 financial year was: R390 million as grants from the DoC. R220 million would be spent on compensation of employees and R109 million on good and services. Compensation of employees in terms of per cent of revenue would be 56.5% with goods and services at 28.1%. The year on year percentage indicated that there would be an increase from 17.7% in 2012/13 in the total expenditure to 42% in the 2013/14 financial year. 

ICASA spent its allocations over the previous three financial years (2009/10, 2010/11 and 2011/12) while the compensation of staff in these years was kept below 60% of the baseline allocations. Cost of goods and services as a percentage of baseline dropped from 41% to 38% and this was attributed to the cost of cutting austerity measures that were applied. With regards to projects and capital goods, ICASA adversely performed, as both trends were downward.

Continuing with the expenditure trends, she said that contributing to the unspent funds in the current year were delays with the acquisition of both postal and broadcast monitoring equipment. This amounted to a total amount of R25 million. Furthermore, the acquisition of the spectrum management system and delayed initiation of projects relating to information technology, markets and competition, licensing and compliance divisions had also contributed adversely to the under spending.

It was expected that the delayed spending patterns in the current year would be reversed mostly during the fourth quarter as most service providers would have delivered on capital goods and services or the Authority would have a contractual agreement in place resulting in a commitment at year end to ensure that ICASA is in a position to retain unspent funds via rollover approval.

With regard to the forecast cash reserves, it was anticipated that the unspent funds at the year-end would be attributed to: opening cash and cash equivalent into 2012/13 of R37 million and closing cash and cash equivalents in 2012/13 of R65 million.  The postal monitoring equipment contract sign off was anticipated towards the end of March 2013.

ICASA was committed to reviewing its budget allocation and to ensure that funding was allocated directly to those core areas that supported government objectives and initiatives. The bulk of ICASA’s operational expenditure was allocated to governance and administration programme. ICASA succeeded in bidding for additional funding to support its operations. The nature of the bids was both Infrastructure (Capital projects) and Non-Infrastructure (Operational expenditure projects). The total normal projects allocation was R32 million for the 2013/14 financial year while the total ring-fenced projects allocation for 2013/14 was R52 million, R15 million in 2014/15 and none in 2015/16.

The ring fenced budget per item was: broadcast monitoring equipment – R15 million in 2012/13 and R15 million in 2014/14; postal monitoring equipment – R10 million in 2012/13 and R10 million in 2014/15; end-to-end automated spectrum management – R6 million in 2012/13 and R10 million in 2014/15; ICASA fleet (vehicles for monitoring and compliance) – R2 million in 2012/13 and R2 million in 2014/15; handheld spectrum analysers – R5 million in the 2013/14 and R15 million in 2014/14; and R5 million in 2013/14 for the test equipment upgrade.

Out of the ring fenced allocation per item, a portion was allocated to operational efficiency projects in the following amounts: relocation of head office R20 million in 2012/13; R5 million each for the years 2012/13 and 2013/14 for IT master systems plan; R5 million in 2012/13 for consumer protection; and R2 million in 2012/13 for consumer complaints handling. 

Dr Stephen Mncube, Chairperson: ICASA appealed to the Committee to approve the: Strategic Plan for the fiscal years 2014-2018; Annual Performance Plan for the fiscal year 2013-2014 and the Budget Expenditure Estimate for the fiscal year 2013-2014.

Discussion

Mr Kekana asked if ICASA has more spectrum engineers from technical institutions. He also pointed out poor signal in rural and mountainous areas because of the spectrum.

Ms Lesoma noticed the approach in ICASA’s approach before the Committee that was a sign of good improvement. What was the problem with the relocation of the headquarters?

Ms Tsebe asked as to what was meant by ‘no capacity to perform monitoring to ensure quality of communication services.’ Was there a system of invoicing in terms of licences and was it reliable? Was there a strategy to focus on the disabled and poor in rural areas as part of consumer affairs?

Ms Shinn asked if it was possible to have national broadband by 2020. What was stopping ICASA from issuing spectrum to those that had applied for it and why did it require reliance on DoC?

Ms Killian said that there was need to see progress by quarter and that specific targets had to be set for each quarter. To what extent would ICASA demonstrate to the National Treasury it was contributing greatly to the fiscus through collection of licence fees before asking for additional funding? ICASA’s appeal for the Committee to approve the strategic plan was premature after a few hours’ presentation and with outstanding issues that required clarification.

Mr Steyn said that there was an indication that targets had been reduced to a lack of funding but there was a need for the targets to be specific for purposes of self-assessment. Concerning risks the increased dialogue with the Minister would not mitigate the risk of national spectrum policy vacuum. Clarification was needed on where the accumulated surplus could be traced on the economic classification report. There was a need for ICASA to indicate how much money it needed to achieve its targets but the dilemma was on the unspent R100 million. There should be an indication in the annual report of what is to be collected and what is actually collected in terms of the licence fees.

Ms Morotua asked for the size of South Africa’s ICT infrastructure.

Ms Shinn sought clarification on the local loop unbundling and the framework for the use of white spaces and cognitive technologies.

Ms Newhoudt-Druchen said that Parliament reserved the right to make surprise visits without necessary giving any warning.

The CEO in response to the questions said that in terms of capacity in spectrum engineering ICASA had an expert that was knowledgeable in the field but spectrum engineering remained a scarce skill. Concerning the headquarter relocation there was a tentative five year agreement that the National Treasury was in agreement with following negotiations with the landlord.

The spectrum fee licence regulations would be used to determine what is outstanding from the operators to the regulator while the general licence fee regulations would enable ICASA to demonstrate its competency in collection of licence fees. With regards to performance information, before formulation of strategic a strategic plan, the Auditor-General is involved to provide comments on proper formulation of targets to reduce the possibility of having a qualified report as a result of audit issues. Concerning the issue of capacity, he said that this was twofold: technical capabilities, which involved finance; and licensing, and compliance. With regards to the reduction of targets, they were re-clustered.

Dr Sam Vilakazi, Deputy Director-General: Administration – DoC speaking on the process of approving a strategic plan, said that once an entity had developed a plan, the DoC would hold a meeting with the Minister following which the DoC would raise issues that would require the entity to respond and after this, there would be an engagement with Parliament.

The Chairperson in guiding the meeting said that ICASA would continue with the response and part of the third quarter performance on 17 April 2013.

The meeting was adjourned.

 

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