Brand South Africa & South African Post Office on their 2013 Annual Reports

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Communications and Digital Technologies

16 October 2013
Chairperson: Mr S Kholwane (ANC)
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Meeting Summary

Brand South Africa presented its national and international brand performance summary which was upbeat:
▪ First year Brand South Africa reported directly to the Presidency
▪ ‘Inspiring New Ways’, Brand South Africa’s new slogan, was launched
▪ Very prominent at BRICS Summit, the Mining Indaba and the World Economic Forum events
▪ Brand South Africa’s Play Your Part initiative continued to make great strides in encouraging active citizenship, pride and patriotism
▪ Team South Africa’s performance at the London Olympics proved to be a wonderful reputation enhancer
▪ The UK and US country offices did extensive work to offset the impact on South Africa’s image by the Marikana and other high profile incidents
▪ South Africa proved it is a destination of choice for major sporting events
▪ Another boost for the country’s reputation came with the announcement that South Africa was chosen to host the greater part of the €1.5 billion international Square Kilometre Array (SKA) radio telescope
▪ South Africa improved its global competitiveness. 3rd best performing BRICS country on the Global Competitiveness Report
▪ Investor Perception survey highlights the headway being made by South Africa in positioning itself as a diverse investment destination
Brand South Africa reported it had had to work hard to counter the negative publicity due to the Marikana mine incident and the Oscar Pistorius case.

Members were impressed by the work of Brand South Africa. There were some concerns about the high employee costs and the discrepancy between the presentation and the Annual Report about whether there were any findings of the Auditor-General on wasteful and irregular expenditure. They asked how Brand SA would increase its footprint around the country. Members pointed out comparatively big increases in expenses from the previous year such as high cell-phone costs. They noted the repeated lack of attendance of some board members. The Brand South Africa delegation provided satisfactory responses to these questions.

The South African Post Office (SAPO) presented the entity’s annual results. SAPO had faced many challenges over the past year: letter mail is declining by 4% each year; the world-wide decline in the economy affected SAPO; there had been company and transport industry strikes; the South African Social Security Agency (SASSA) had stopped using the Post Office to deliver pensions; the government subsidy had been decreasing over the years – from R180.442 m in 2012 to R51.965 m in 2013. These challenges meant a R180 million negative profit. SAPO performance is a sum of the contribution of each of the divisions: Postbank contributes the most towards overall profits with a net profit of R99m. The Courier and Freight Group (CFG) posted a R50 m loss. The Document Exchange Group (Docex) had a loss of R800 000. On the other hand, parcel mail was a growing component of the business. E-business was a growing market and satisfaction was high among users of online shopping. SAPO aims to deliver well regardless of the challenges: there are 629 post offices located in the previously underserviced areas and SAPO had completed 50 new outlets to increase access and convenience and delivered 1 200 new addresses. SAPO had to innovate to remain relevant. SAPO achieved 41% of their targets and the Key Performance Indicators (KPIs) were completed within 90%. The statement of comprehensive income shows that revenue had decreased by 3%, expenses rose by 4% and the loss before tax had risen by 119% from the previous financial year. The Board said there was a comprehensive turnaround strategy to improve the situation, particularly in Courier and Freight and also at Group level.

The Members asked how SAPO would manage in terms of remuneration in an organization where 57% of expenses were employee costs. SAPO’s financial sustainability had been threatened for a number of years and the members wanted to know how SAPO would handle this. They also asked why the courier business was flat if online retail is on the rise. They asked about the reports of fraud amongst the staff. They asked about reasons for the irregular and fruitless and wasteful expenditure. They wanted to know what would be done about the operating loss. Some Members suggested that SAPO needs to cut employee salaries for the sake of financial sustainability. They also expressed concerns about the hybrid mail process, the inputs of the Auditor-General, and about the payment of bonuses. The SAPO delegation was asked to provide reports on the progress with the urgent issues that need to be addressed.

Meeting report

The Chairperson acknowledged the apology from Ms Charlotte Chichi Maponya, Board Chairperson of Brand South Africa, for her absence.

Brand South Africa briefing
Mr Happy Ntshingila, Brand South Africa Acting Chairperson, introduced the delegation. He highlighted the mandate of Brand South Africa which is to build South Africa’s brand reputation for international competitiveness and to increase patriotism among South Africans. He quoted the Auditor-General by saying the financial statements represent fairly the financial position of Brand South Africa (BSA) and the year-end cash flows are in accordance with SA Standards of Generally Recognised Accounting Standards (GRAP) and Public Finance Management Standards (PFMA) requirements. The President had appointed new board members. There was 81.8% achievement of performance activities and for the first time BSA reported directly to the Presidency. BSA launched their new slogan: “Inspiring new ways”. Mr Ntshingila then played their ad campaign with the theme, “I don’t think I can change the world, I know it.” He spoke of BSA prominence at the BRICS the Brazil Russia India China South Africa association) Summit, the Mining Indaba, the World Economic Forum and the London Olympics. BSA continues with the Play Your Part Initiative which generates awareness around the ’16 Days of Activism’. SA’s performance at London Olympics raised the reputation of the country. BSA said that it managed to counteract the negative impact Marikana had on SA's reputation. BSA had a Smart phone application launch for the public to see what is going on in their country. BSA also hosted the Africa Cup of Nations (AFCON) and the Square Kilometre Array (SKA) radio telescope. South Africa improved global competitiveness - ranked 3rd best performing BRICS country on the Global Competiveness Report and ranked 5th in the Ibrahim Index of African Corporate Governance.

Mr Miller Matola, Brand South Africa CEO, presented the national brand performance summary. On the domestic perceptions audit, more South Africans are proud to be South African. Commitment is high – active citizenship. BSA worked with Government Communication and Information System (GCIS) and other research companies to get statistics for performance indices. South Africa is ranked 36 out of 50 for national brand reputation. South Africa’s World Economic Forum (WEF) Global Competitiveness Index declined by two points. The International Tracker is to track the options of investor tastes and SA’s hosting of BRICS Summit in March 2013 marked a high point for the country on this tracker. Average reputation score is 35%. The reputation score is low due to the Marikana mine incident and the Oscar Pistorius case. South SA ranks higher than its BRICS counterparts in ease of doing business and on six out of the twelve performance pillars in the Nation Brand Index. BSA had improved under the Human Development Index and performance had increased due to interventions in health and infant mortality. South Africa is improving in class mobility. The majority of South Africans see themselves in a better class position than their parents, although the youth are still anxious about getting jobs. There is more social cohesion. The majority of South Africans are proud to be South Africans and want to contribute towards improving the nation. People are confident about what South Africa had to offer.

Brand SA extended its stakeholder engagements so the number of stakeholders had expanded, such as political parties. BSA had increased collaboration with faith-based and youth organizations to promote active citizenship. The new BSA positioning launch was successful – 44% of international respondents were aware of the “Inspiring new ways” line according to a survey. The 30- and 60-second business advertisements launched on CNN on the biggest television night in the United States of America (USA) during the presidential elections raised awareness about South Africa. The State of the Nation in Numbers info graphic was distributed immediately after President Zuma’s address on 14th February 2013. The “Play Your Part Initiative” which airs every Monday night at 7pm on SABC1 and on Radio is a 13-part series that encourages all South Africans to contribute towards positive change. Shape the Future brings business leaders and young people together with a focus on youth employment. BSA had relationships with Business Unity South Africa (BUSA), Business Leadership South Africa, the Black Business Council and other central programmes for mobilizing South Africans. BSA had also partnered with the Department of Transport (DOT) to promote the ongoing ‘Arrive Alive Campaign’.

Mr Matola played a video clip of the Play Your Part 13-episode TV series. It was voted as one of the top 10 most viewed documentary on all SABC channels and reached 51.6% of the target market. BSA is working with Global South Africans (GSA) to promote South African products and services. BSA continued high level engagement with government stakeholders. Brand SA is on Twitter.

BSA on the International platform said South Africa had been prominent at the BRICS Summit, the Mining Indaba and the World Economic Forum events. These presented opportunities for BSA to ensure that all stakeholders are behind SA’s nation brand. BSA partnered with Deloitte in the Africa Dialogue Conference and with and the Department of Trade and Industry (DTI) in developing the “Why Invest in SA TV commercial”. BSA had an African Development Agenda to Expand to other African Countries and had provided support in the United Arab Emirates (UAE). BSA worked on direct engagement between South African and Brazilian business and also did some in-country activation in Russia, India and China. South Africa had been positioned as an investment hub and had achieved 81% overall performance.

Ms Alice Pudane, Brand South Africa CFO, spoke about the organisational sustainability of the entity. The Microsoft Relationship management system was successfully deployed. BSA experienced no litigation. Legal services is a high cost item as BSA manages intellectual property of trademarks. There was a concerted effort during 2012/13 to correct the 2011/12 audit findings and to ensure that HR administration could withstand strict scrutiny. BSA reviewed policy and strategies such as the Talent Management Strategy for a competent workforce. The human resources (HR) department is going green to reduce its carbon foot print. 38% females are at top level management at BSA. BSA employed two disabled persons out of a staff of 33. BSA had an unqualified audit result, work remains to be done in the area of the procurement of goods and services. The R10.378 m worth of irregular expenditure in 2011/12 was reduced to no irregular expenditure disclosed this financial year. A 23 m overspend was disclosed because BSA had not received approval from Treasury to retain an accumulated surplus but approval was received this financial year to retain these funds. Assets were re-evaluated for purposes of impairment to comply with GRAP standards. The adjudication committee did not constitute of members according to policy. The policies in terms of supply chain management were inadequate and were reviewed to be aligned with the national prescripts. There was a 6% increase in revenue from R140 089 m to R154 779 m. R6 million of this was allocated to AFCON. Operating expenditure seemed to be lower due to the Accumulated Surplus in 2011/2012 that BSA had to spend. Increase in operating leases and deposits was due to the need for additional space as staff volumes were being increased to have people work internally and stop relying on agencies. The accumulated surplus of R6 m had been committed and would be spent as soon as National Treasury approves its retention. The R28 m worth of deficits in the 2011/12 financial year was due to unauthorised expenditure. BSA had managed to bring the deficit to R2.27 m at the 2012/13 financial year end. BSA incurred R26.8 m in staff costs. R1 667 000 was invested in fixed assets and BSA had no loans. About R6.28 was raised including investment income. Total expenditure was R162 m. The loss on foreign exchange increased due to volatility of the Rand.

Mr Matola discussed competitiveness with implementing the National Development Plan (NDP). BSA is hosting the South African Competitiveness Forum. Going forward, BSA aims to promote South Africa as a business destination. The Play your Part Programme would be the backbone of the NDP, and the 20 years democratic achievement and success. Achievements of BSA would form a big part of the Strategic Plan. BSA would continue with Marketing and Communications managing programmes both in SA and abroad.

Discussion
Ms S Tsebe (ANC) commended the great performance. She asked how BSA is aligned with the NDP. She commended the unqualified audit BSA had had over the past years. She asked what BSA had done to address the Auditor-General’s concerns (e.g. issues on procurement and contract management and expenditure management). She felt that these could impact negatively on the Annual Report of the next financial year. She asked whose opinion it was to outsource an information technology (IT) service provider. She wanted to know what happened to the internal IT team within the organization with respect to the new board registration. She also asked what was going to happen with respect to the IT system plan tender withdrawal due to budget; what was going on with Brand South Africa program pending approval of candidates and what was the situation with the Corporate Identity (CI) manual.

Ms R Lesoma (ANC) welcomed the work BSA was doing with appreciation. BSA was one of the entities that make this Portfolio Committee proud. She mentioned the fruitless and wasteful expenditure that had increased from 2011 to 2013 and acknowledged that Alice Pudane had given reasons for this. However, she wanted to know if there was any willingness from the Board of Trustees to address this issue of unstable employment. She asked why board attendance was omitted from the report and what would be done going forward. On Information and Communications Technology (ICT) strategies, she asked what the legal costs were for safeguarding BSA”s intellectual property. She asked whether BSA was getting value for money on these costs. She added that GCIS should come to negate the negative publicity that BSA had received. She concluded her questions by saying that she was happy with the audit report.

Ms M Shinn (DA) commented that the report of the Department of Communications did not cover South Africa’s performance at the London Olympics. She asked whether BSA covers this information in its Annual Report. She asked what caused the increase in security expenditure. She said that BSA should not be promoting the ANC at centenary celebrations, but rather the whole country. She mentioned that taxpayers’ money was being wasted because of this and it should stop. She mentioned promotion of the ANC in the BRICS nations. She stated that the celebration of South African freedom should be party neutral.

Mr A Steyn (DA) asked what BSA would do about increasing levels of anxiety about South Africa’s performance in education – from 40% in 2009 to 54% anxiety in 2012. He asked why BSA said in the presentation they had no fruitless expenditure but under AG inputs in the Annual Report the AG says that accounting officer did not take adequate steps to prevent fruitless and wasteful expenditure according to regulations. He noticed that expenses had increased significantly for auditor remuneration, pension contributions, staff welfare, overseas travel, cell-phone reimbursement, annual remuneration, and he asked why the discrepancies were so great between 2012 and 2013. He asked where the R30 510 446 Nedbank amount comes from in the financial instruments in the notes to the financial statement. He asked why disciplinary action was flawed this financial year as irregular and fruitless expenditure amounted to R 370 468 this year but no disciplinary action was taken. She asked why the performance results (outcomes) – brand alignment by stakeholders, increased pride and patriotism and competitiveness – on page 127 of the Annual Report did not correspond with the performance results on the presentation. Regarding changing perceptions about SA within international target audiences, Mr Steyn said BSA must stop focusing on countries where awareness had already been created but must extend the BSA footprint beyond. He asked why the target of compliance to a performance management system was not met and said that BSA needed a stronger performance management system. He asked why the target to highlight South Africa as the gateway to Africa was not met. He also asked why 4th quarter charges were paid into the next financial year. He said this was not acceptable as it impacted the financial statements and the views of the Auditor-General.

Ms Shinn asked about attendance at Board meetings as some board members, mentioning in particular Cassius Lubisi who attended only one meeting, Ajay Gupta and Sandile Zungu who attended no meetings at all this financial year. She asked why these people were still trustees if they did not attend meetings.

Ms Lesoma said everyone needed to accept that the government department would always tell the Portfolio Committee what they want to hear. She found no problem with BSA endorsing ANC as the ANC did represent the majority of the country and would continue doing so.

Mr Matola explained that the National Development Plan formed the basis of BSA goals. He said that things were different for BSA before the NDP had been adopted, but now the BSA plans were completely aligned with the NDP. The BSA brand ambassadors process was pending approval BSA would be announcing the domestic ambassadors at the South African competitiveness forum soon. He handed over to the CFO to answer the other questions.

Ms Pudane explained that the outsourced IT service provider that BSA has would not be used indefinitely. She said BSA was working on a new IT structure as the manual system plan was placed on hold due to the shortfalls of the Enterprise Resource Planning (ERP) system. The organization was in the process of finding the system that suits BSA best. With regards to trademarks, there were legal fees involved and she guaranteed that BSA had sorted these out already. The wasteful expenditure incurred in the previous year was due to cancellation of tenders and BSA was now avoiding this. The fruitless expenditure was due to Commission for Conciliation, Mediation, and Arbitration (CCMA) costs incurred last year and also as a result of an international employee who felt that he was given the wrong idea regarding the duration of his contact and thus deserved compensation for this. She added that the AG statements on reporting were standard as per regulations. She clarified that the increase in security expenses was because of the office refurbishment. She explained that AG remuneration had increased partly because of inflation and the AG having to follow up on BSA from the previous year to ensure that everything was on par. She hoped going forward the AG remuneration would stabilize. Placement fees had increased due to high staff attrition due to staff leaving. The staff costs were for team building, staff wellness, etc. The travel costs were incurred because BSA had relations with other countries and there was sometimes a need for staff to travel abroad to attend meetings and conferences. The venue costs were incurred for the roundtable discussions that had to take place with stakeholders. The increase in CEO cell-phone expenses was due to roaming expenses. The subsistence allowance was included in reimbursement and allowances expenses from the previous year. The CFO started claiming for last year’s calls only this year. The only bonuses paid in the 2012/13 financial period were incentive bonuses and not 13th cheques. The BSA would present to the Board a new system for bonuses. The Nedbank amount relates to cash balances at the end of the year. It increased significantly because BSA received the money only in the 4th quarter.

Mr Matola said that with regards to the Olympics, sports definitely builds the reputation of a country. BSA had signed a Memorandum of Understanding (MOU) with the Department and had major events with them. The country managers and agencies BSA uses understand the media landscape. The State of the Nation Address set out policy that other countries were interested in, including China. In terms of endorsing the ANC, BSA maintained the reputation of South Africa. The elective conference was of the ruling party and BSA branding was in response to what negative media coverage was coming up with; BSA was addressing negative views about the ruling party. With 20 years of democracy, the brand was based on broad achievement of the country and the campaign was not party specific. On international awareness, he explained that BSA cannot track awareness levels in some countries and that affects which countries BSA focuses on. The matter of irregular expenditure on legal fees was a matter of the registration of Trustees. BSA received incorrect advice that board members who were resigning had to write letters of resignation according to the advisor. This ended up not being necessary as the terms of the trustees were coming to an end. So even though lawyers did apologize, unnecessary costs were still incurred.

Mzimkulu Malunga, a BSA Board Member, said that the board dealt with governance issues, which was a big achievement for them. On performance management, he explained that there was approved policy in place. The biggest issue with trustee attendance was timing and he stressed that the attendance of Mr Zungu, Mr Gupta, and Mr Lubisi had improved. He added that BSA could not just get rid of trustees due to no attendance.

Ms Tsebe took the Chairperson’s position and opened up the floor for some follow-up questions.

Ms Shinn asked about the interview that was cancelled due to an attendance issue. She also asked if BSA receives sufficient commitment from Government officials and stakeholders to partake in BSA programs.

Mr Steyn asked about the 72% funded posts versus the 94% expenditure on employees. He asked if the BSA had a cap for cell-phone reimbursements and suggested that BSA find more cost-effective ways for roaming,

Ms Morutoa asked whether Cabinet arranges that the BSA mandate overlaps with Environmental and International Affairs mandate.

Ms Tsebe asked if any policy exists on cell-phone allowances. On the use of venues for conferences and seminars, she asked whether for the past financial years there was no allocation for venues and roundtables. She asked what incorrect legal advice really meant in the Annual Report.

Mr Ntshingila replied that BSA had re ally tried to engage with stakeholders which was a big part of what BSA did. Sometimes BSA would like more nudging from the top for government to be more involved.

Mr Hlekane explained that the interview issue was when a particular person was supposed to attend a meeting but could not attend due to another commitment. BSA in the past could not implement a lot of activities until this past financial year. As a result, expenditure this year was a more realistic representation of how expenses should be at BSA because activities had been implemented at the intended level. BSA had a co-operation framework to eliminate duplication with SA Tourism, GCIS, Department of Trade and Industry (DTI), and Trade and Investment South Africa (TISA), so there was no overlap of the BSA mandate with these organizations. On the incorrect legal advice, the prevailing opinion was optional and was not the necessary solution.

Ms Pudane explained that there was a difference in cell-phone allowances for different posts. BSA would explore what other cost effective ways there were for roaming.

Mr Ntshingila thanked Members for advice and counsel of the Portfolio Committee and would do all they could to improve performance. He ended by saying that the mandate of Brand South Africa was for all South Africans.

Afternoon session
South African Post Office (SAPO) 2012/2013 Annual Report
Ms Hlamalani Manzini, SAPO Acting Chairperson, introduced the delegation. The Post Office acknowledged the role that SAPO is playing in the developmental state of South Africa. It not only brought communication to the rural communities but it assisted the rural community to participate in the economy of the country. The Post Office had a challenging year due to the competitive environment and a decrease in the number of people posting mail. The loss of the South African Social Security Agency (SASSA) paying pensions via the post office affected SAPO business. Government subsidies had also decreased and there had been various company and transport industry strikes. Positives were the Post Office had an expanded presence in the rural areas, more post office services were being introduced and the rolling out of addresses. SAPO posted a negative profit of R180 m but it had a comprehensive turnaround strategy to improve the situation particularly in Courier and Freight and also at Group level. and would be experiencing profit from it. The presentation would address the procurement task team that had received negative media reports. However, the task team was formed to address irregular expenditure and supply chain management practices so the entity could comply with Treasury regulations which all state-owned enterprises had to comply with from December 2012. She explained that the task team had never dealt with awarding tenders. The media reports of alleged corruption, the Board is dealing with. There were also reports about the election of Board and CEO. The Board had confidence in how the CEO was dealing with the issues under his delegation. The former chair holder was also in media reports and the Board had heard about a letter written to the President . The Board was on top of dealing with the various negative media reports and aimed to strengthen the turnaround strategy and had started to implement ways to deal with all the highlighted problems, some of which were a bit inaccurate. In conclusion, they were alive to the role of SAPO, they acknowledged the challenges and they had a plan to deal with these challenges.

Mr Christopher Hlekane, CEO of SAPO, presented the annual results. He emphasized that the vision, mission, and values of SAPO had not changed. The focus was on the customer and shareholder. SAPO aimed to be efficient and invest in its people. Governance was a key asset in the SAPO networks and the organization continued to look at innovation. SAPO aimed to understand customer needs and was aligned to the regulatory framework. SAPO had faced many challenges, one of which was that letter mail was declining by 4% each year. On the other hand, parcel mail was a growing component of the business. E-business was a growing market and satisfaction was high among users of online shopping. There was an opportunity in the decline of mail for SAPO to explore other avenues of business. The world-wide decline in the economy affected SAPO. Strikes affected SAPO profit and the entity had tried to minimize operating costs. The SASSA subsidy which helped SAPO with its business positioning had been decreasing over the years. SAPO performance was a sum of the contribution of each of the divisions. Postbank contributed the most towards overall profits with a net profit of R99m. The Courier and Freight Group (CFG) posted a R50 m loss and the Document Exchange Group (Docex) a loss of R800 000. SAPO excluding Postbank was challenged with a net loss of R259 million. The subsidy allocations had declined over the last five years – from R180.442 m in 2012 to R51.965 m in 2013. SAPO aimed to deliver well regardless of the challenges. There were 629 post offices located in the previously underserviced areas. For SAPO to survive, continuous engagement with ICASA and National Treasury was a main focus to find an appropriate way to deliver on mandate. SAPO completed 50 new outlets to increase access and convenience and delivered 1 200 new addresses. Service delivery was low in May due to strikes – it was at 92% instead of 95%. The R180 m loss disclosed was a sign that SAPO had to continue to work on the delivery component of their mandate. SAPO aimed to increase its footprint by delivering further as the gap was still high.

Ms R Morutoa (ANC) interrupted saying that she was concerned that Gauteng was not included in the areas where SAPO aims to increase its footprint.

Mr Hlekane agreed that her concern was an issue indeed, especially considering how many people migrate to Gauteng. On retail infrastructure deployment, SAPO wants a better model where mobile solutions were not the only option and had looked into the suggestions the Portfolio Committee had given last year considering budgetary constraints. SAPO continued to plant trees and be greener by decreasing their carbon emissions through recycling paper, decrease electricity consumption, and continued participation in the Carbon Disclosure Project. SAPO contributed toward HIV and poverty reduction in Limpopo and the Eastern Cape. SAPO focuses on area of staff relations and training, spending R38m out of their R45 m budget on this. Going forward for 2013/2014, SAPO was looking at it value proposition in its totality. SAPO continued to innovate to remain relevant. Looking at the summary of performance/score card, SAPO achieved 41% of their targets and the Key Performance Indicators (KPIs) were completed within 90%. On financial sustainability, there was a deep volume decline and the loss of SASSA business. Consolidation of functions was not achieved, the main focus of which was the Postbank licence. SAPO had a trained workforce in terms of bursaries and learnerships but the target of stable well trained and satisfied workforce was not met. The diversification strategy to ensure all business units were engaged with the turnaround strategy was not achieved. Under delivery on licence requirements, targets which was partially achieved, the main concern was with service delivery and logistics in May when there were strikes. SAPO had put structures in place for corporate governance but still was lacking with data capturing. SAPO also needed to quantify targets for environmental sustainability. Priorities for next year included ensuring financial sustainability and continuing with the corporatization of Postbank. SAPO would continue to look at human capital and remain relevant in the economy of the country.

Ms Manzini noted that the president of the Commercial Workers Union and the SAPO Workers Union were present at the meeting.

Ms Khumo Mzozoyana, CFO of SAPO, presented the financial performance of SAPO. The expenses had increased by 4.4%, while revenue, profit, tax and net profits and total assets had decreased. She added that deposits from the public had increased, return on assets had decreased and cash had remained stagnant. Since 2008 there seemed to be a stagnation in revenue and expenditure trends. The last strike cost SAPO approximately R102 m and the one before that cost the organization R35 m. The focus was to optimize and reduce expenses to match low revenues. Mail revenue constituted 71% of total revenue. There was no growth with the courier services and SAPO needed to move towards a new revenue mix and not depend solely on mail for its core business. Employee costs made up 57% of total 2012/13 expenses. Transport and Freight and Property and rentals were other big costs for SAPO. The statement of financial position showed that total assets had decreased. There had been 12% growth in financial assets under medical aid. The money market had also grown by 6%. The Statement of Comprehensive Income shows that revenue had decreased by 3%, expenses rose by 4% and the loss before tax had risen by 119% from the previous financial year. As there was almost no subsidy in the current financial year, cash flows from operating activities were strong in 2011 but declined from then onwards. Cash flows from investing activities in 2013 had increased from 2012. Irregular expenditure related to prior years and fruitless and wasteful expenditure was due to purchases of unused 3G cards, penalties and interest related to the strikes, and rent paid without occupation. SAPO had formulated a Financial Misconduct Policy which enabled the management of financial misconduct activities. A financial misconduct committee had also been established and mandated through the financial misconduct policy to regulate, monitor and report on all proven fruitless, wasteful and irregular expenditure. Investigations were underway for the irregular expenditure not condoned that was incurred. SAPO received a clean audit opinion with one emphasis of matter: SAPO was not a going concern. The withdrawal of the government subsidy and the additional costs to fund the Postbank corporatization would further add pressure on the performance of the SA Post Office.

Discussion
Ms Morutoa said that SAPO provides a very important service to South Africa. Mentioning that SAPO had 17 000 employees, she asked how SAPO would manage in terms of remuneration in an organization where 57% of expenses were employee costs. She quoted a professor saying, “...So long as democratic government believes that the Post Office fosters its goals on national unity through a connected populace, it should extend the post office a lifeline in terms of a continued subsidy...”. Given the gaps, the Department of Communications and National Treasury should be responsible for the gaps. SAPO was such an important entity but its situation was getting worse. She asked why SAPO needed to meet international expectations on the AG findings? What had the Post Office done about wasteful and fruitless and irregular expenditure? She asked what had been done about the 2011/12 unachieved targets. The SAPO issue was serious and SAPO needed to discuss what remedies to take as there seemed to be no positive feedback in the Annual Report and presentation.

Ms R Lesoma (ANC) welcomed the unions and Department of Communications (DoC) representatives present at the meeting. Regardless of shortcomings, there was hope for SAPO as long as it was able to continue as a going concern. She appreciated Ms Manzini’s opening remarks. She asked how far SAPO was with the migration of employment agency personnel to direct employment for the post office and the financial implications as stability in workforce was necessary. She was worried about SAPO’s financial sustainability because SAPO raised the same problems when they presented the report last year. She asked who was underwriting the borrowings and how were those persons compensated. She asked how the 3G cards under irregular expenditure were related to the strike. On property rentals, she asked which properties these were because that expense affected financial sustainability. She referred to the table on SAPO compliance status against the global reporting initiative framework and asked what it meant for temporary staff. She asked how SAPO planned to make the Post Office the service provider of choice. She also asked where the three mobile offices would be deployed.

Ms M Shinn (DA) said that SAPO's financial sustainability had been threatened for a number of years and government was partially liable for this. She asked what was being done to correct this policy and when would be the deadline, if any. She asked how the courier business was declining if online retail was on the rise. She asked how SAPO could be having 39% of robberies. She asked what the nature of the fraudulent activities by staff was. She asked how many had been charged and whether there had been any dismissals. The fact that employee costs constituted the majority of SAPO costs was unsustainable. She asked how SAPO would improve the issue of such high employee costs.

Mr Hlekane commented on the labour broker matter saying that they had sorted out the issue of migration from brokers. On rental, SAPO planned to finalize relationships. The post office had developed a turnaround strategy to improve financial sustainability and tackle the decline of subsidies. Through this turnaround strategy, SAPO aimed for the Courier and Freight Group (CFG) to break even at the least. Corporatization of Postbank was to build efficiency. To counter mail decline, SAPO's focus turned to E-business which had a R100 m turnover last year and SAPO aimed to double this next year.

Ms Mzozoyana said SAPO was currently going through a process of identification of contracts that could have lapsed to identify all irregular expenditure, get contracts condoned, and then control. After identification, the aim was to ensure regular contracts. She explained that the 3G cards had nothing to do with strikes, but the penalties and interests did. The 3G cards were those not in use, but paid for. The labour broker and identification costs had remained flat. Borrowings for subsidiaries were a shared service arrangement, so they had a group chief information officer, management accounting team and finance team. The borrowings were intercompany, e.g. CFG would get a loan through SAPO.

Ms Morutua asked why there were stipulated terms of payment.

Ms Mzozoyana replied that this was how it worked in the SAPO group with subsidiaries.

Mr Hlekane said that in terms of the loss, e-solutions should substitute the decline in business. SAPO was looking at volumes of mail and what the best way to deliver was. Solutions for funding the universal service obligation (USO) were more comprehensive. SAPO was aggressively working on timelines. CFG had made strides to break even already. He added that positioning for responding to clients online was something SAPO was working on.

Mr Newyear Ntuli, Group executive of E-business at SAPO, said that SAPO was working on creating an online business for the Post Office in an effort to accelerate online activities.

Mr Ndala Mnisi, Group executive of Retail at SAPO, discussed hybrid mail solutions – a virtual post office for online interaction to pay fines and other bills. SAPO had already started working with three municipalities on this initiative.

Ms Morutoa said she was tempted to say SAPO was an enemy unto themselves. She asked why all this positive information that showed progress was not communicated during the actual presentation.

Mr Hlekane acknowledged the comment and declared that next time the delegation would do better to communicate in more detail the work that SAPO was doing.

Mr Mnisi said that mobile post office units had already been deployed in Cape Town although routes had not been finalized yet. SAPO needed to tell the community about the availability of the service first and would also be converting another four vehicles into mobile post offices to serve underserviced areas.

Mr Molefe Mathibe who was managing director at CFG and acting managing director at Docex, said that for online shopping, SAPO was working on an online proof of delivery system. The courier business was booming, but because of networks, there was an issue of movement of boxes. The Minister had seen what CFG was doing. With the issue of movement of medicine, SAPO was creating a cross docket system to deliver medication on time. This system was starting in Gauteng.

Ms Susan Myburg, acting Group Executive in Human Resources at SAPO, explained that most crimes by staff were fraud (financial misconduct) and a committee had been put in place. 606 cases were investigated. 84% of which were taken to the South African police and the others were referred to the Commission for Conciliation, Mediation, and Arbitration (CCMA).

The Chairperson asked how come they had percentage statistics for some crime cases and only values for others.

Ms Myburg explained that some cases had been referred to CCMA and some people did come back so there were fluctuations.

Ms Mzozoyana explained that the increase in employee costs was due to inflation and also the increase in salary amounts for employees.

Mr A Steyn (DA) referred to the Annual Report and asked why SAPO reported an operating loss when there was a surplus in the previous financial year. SAPO needed to cut employee salaries for the sake of financial sustainability. The decrease in the subsidy amount was not new news for SAPO and they should plan for it. He asked for how many years would the project establishing 50 new access points each year, run. He referred to the group key performance indicators in the Annual Report saying that most of the targets had not been achieved. This was a sure indicator that the entity was in trouble and SAPO needed a greater sense of urgency about the challenges. He asked if any Board members were part of the committees of the Board team. He asked what exactly the task team/committees do and if they had shelf life or not. There was too much high risk in the 2012/13 risk register and this must be addressed. He referred to the fact that the Audit Committee Chairperson position was currently vacant and commented that this was a problem. He asked what was going on with regards to IT governance. Lastly, he asked why school books were being delivered only in the Northern Cape and not the rest of the provinces. Substantial equipment would be needed for hybrid mail business and it was wishful thinking to expect higher volumes. He asked if SAPO had the capital for this investment. He asked who condoned the wasteful, fruitless expenditure and requested an answer for this in writing. He insisted that the money spent on the 3G cards (wasteful expenditure) must be recovered and he asked how SAPO would go about this. He mentioned that the AG had questioned SAPO asset management. Now that a Heritage Museum was being built, he asked how the assets would be monitored. He asked what the concerns of the audit committee with management reports were; how the loss in excess R200 m was funded and how much the overdraft fund was if that’s what funded the loss. He commented that CFG should be a profit making organization. He asked why SAPO would allow writing off of debts without any collateral when money was being lost. SAPO could not be lending interest-free money either. He asked how SAPO paid out bonuses when the entity was suffering a loss. He asked if the shareholder had played a role in the investigations.

Ms Lesoma asked if the subsidiary loans were in line with reporting regulations. She commented that the financial unsustainability was a sign of poor management. She asked if SAPO had a standard pay curve for subsidiaries. The mobile offices were good and added that E-service would inform the mobile offices service considering universal coverage and the population. She asked where the vibrancy of the audit and risk committee was when it came to the unutilized rental office space. She asked if SAPO had a deliberate capacity plan/training for board members.

Ms S Tsebe (ANC) said she was disappointed by the Post Office report this time around. There were more real underlying problems and these must be communicated so that the Portfolio Committee can assist. She requested a separate report about their specific programs with time frames to address each and every target not achieved. She referred to the 2010/11 report where approximately R40.7 m was spent on learning and development interventions and asked for details. The Portfolio Committee did not receive a progress report and she asked why. She asked why nothing was happening in the Northern Cape with the mobile post offices. She asked for terms of reference for the Logistics Audit Committee. She asked about the cases of increased common fraud. In the table of SAPO compliance status against the General Requirements Index Framework in the Annual Report, she asked why SAPO did not comply with most of the aspects that improve sustainability.

Mr Hlekane explained that with the hybrid mail extension, communication would be e-based and there would be saving on transport costs which would increase revenue. Technological changes were at play with the client interface and this would be the first phase of e-business value. At the moment SAPO had three sites and aimed to have seven sites which would provide an indication of the growth path. On the target of 50 outlets annually, part of the Information and Communications Technology (ICT) review was to provide similar services. The same targets were set against alternative ways of reaching customers. It was critical to look at alternative/cheaper ways to reach out to communities. With the 50 per year target a lot of ground needed to be covered so it would remain indefinite for now.

Ms Mzozoyana discussed performance again. The loss had been absorbed by retained earnings. She explained that SAPO had responded to subsidy loss and had tried to mitigate the risk. She stressed the need to recognize that SAPO would take a dip before recovering. The turnaround strategy was to help SAPO rise. She agreed that the salary bill was high. The issue was aligning the salaries with the decline in mail. SAPO was working on making salary costs more variable, looking at how many employees the organization actually needed. On irregular condonement, she explained that contracts were awarded by different entities which condone various expenditure. The fruitless expenditure had not been condoned and was being investigated. SAPO was still going through a financial misconduct process to recover money lost through wasteful expenditure. SAPO did have an asset register but some assets had not been found. SAPO was working with International Financial Reporting Standards (IFRS) which did not have heritage assets and also working with Generally Recognized Accounting Practice (GRAP) to measure the value of the assets. SAPO runs under the Public Finance Management Act (PFMA) and Companies Act. The Companies Act did allow the company to give loans to subsidiaries as per section 45. Impairment of debt was for debt that was older than 90 days. SAPO paid bonuses to employees who fall under the unit and they must be paid a bonus according substantive laws.

Mr Hlekane said that the Board believes that CFG would break even under the turnaround strategy because CFG was contingent on consolidation of all the business with the CFG as one single operation. Loss may have been incurred, but consolidating all the services into one would result in accrual of value.

Mr Brighton Tiribabi, acting Group Chief Information Officer (CIO), told Members about the Infrastructure Research Project which was going well. 90% of the platform engaged a service provider who did a 24/7 vulnerability search to identify who uses their online services. This was for security purposes. SAPO had also engaged in a project for database management which had already been initiated. With regards to the viability of the disaster recovery site, SAPO would be able to have disaster recovery for Postbank in the reasonable future.

Mr Mnisi said SAPO had a shortfall of 2 734 points of presence according to the census. Looking at the Motaung area, the organization was working on converting a fifth mobile unit and would also source another five units to be deployed to the other areas.

Ms Myburg said SAPO had a workplace skills plan for all levels in the organization. She explained that employees do delivery of training to the business units. She did not have exact numbers for training in each province but would provide a report disclosing this information to the Portfolio Committee. Most training was focused on business-related requirements. She mentioned a Bachelor of Business Administration (BBA) degree, training for specific skills programmes, running five learnerships as part of compliance requirements, technology programmes and CSI programmes to expand literacy, and specific Recognition of Prior Learning (RPL) programs.

Ms Mzozoyana explained that SAPO was driving towards reporting sustainability as the global companies were reporting. However, some indicators did not apply to SAPO, hence SAPO could not comply with those and would customize the report going forward. The fund that absorbed the loss was the R80 m approved overdraft which had not yet been used at the time of reporting.

Mr Hlekane said that the rental costs exceeding what was received were a result of underserviced post offices. SAPO was looking at alternatives for looking at their portfolio. SAPO was working to solve this and also come up with a way forward for funding requirements.

Ms Tsebe asked again about the increase in common fraud and how SAPO planned to address this.

Ms Myburg responded that she had answered the question in Ms Tsebe’s absence and responded that 606 people were investigated, 84% of which were reported to the police. There was a 15-17% dismissal rate depending on CCMA cases. Mostly were due to gross negligence, fraud (financial misconduct) and cash shortages. They had put in place a committee to look after financial misconduct. They had updated polices to look at misconduct and had a Crime Busters hotline as well.

Ms Buhle Mthethwa, chairperson of the procurement task team at SAPO, explained that the organization was within its mandate to develop this task team which was an advisory team to the Board. The Board members did constitute the team which looked intricately at what was causing the irregular expenditure. Terms of reference were approved by the Board. The task team had a duration and a service provider was appointed to assist the Board.

Mr Hilmi Daniels, acting chairperson of the Audit Committee, discussed quality of management reports saying that if information technology (IT) problems were resolved, 80% of the audit problems would be solved. The risk and audit committee was alive and they sent monthly reports to the DoC. The terms of reference for the logistics audit were similar to those of SAPO for proper compliance with regulations. The terms of reference which were approved by the Board would be sent to the Portfolio Committee.

Ms Manzini said the right type of IT governance was in place. SAPO was taking the necessary steps to investigate corruption and was awaiting a report from the police before taking any further action. There was a program to train board members and most of them had gone through the training. The Board did look at ways for financial sustainability and that was how the turnaround strategy came about. She explained the vacancies were due to members retiring but these vacancies would be filled. The Board was committed and had made sacrifices to improve things.

The Chairperson echoed Ms Morutoa when he asked if SAPO was addressing the right issues. He questioned whether the Policy Framework was still relevant and suitable. The policy review meeting would help answer this through new policy direction. SAPO needed to address the board vacancies and fill up the director posts. Clarity was needed from the Minister as the shareholder regarding where he thought SAPO was actually headed. The 606 irregular expenditure cases was shocking and he found it depressing that the Members did not know about it in time. He commended the Board for their work and encouraged them to keep it up. The Portfolio Committee wants a report on training, audit programmes, etc. as requested by the Members during the discussion.

The meeting was adjourned.

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