SITA & SAPO 2017/18 Annual Reports; iKamva Bill: deliberations

Meeting report

SA Post Office (SAPO): Annual Report

Mr Mark Barnes, Chief Executive Officer (CEO), SA Post Office (SAPO), said that as Members might recall, at the beginning of their turnaround strategy they had said that they wanted to get 30% of their business from government, and it was firmly and in line with that strategy that they were seeking to expand those kinds of things. He would describe the year as not great, but moving in the right direction, if asked for a summary. All of the indicators were moving in the right direction, except for postal revenue. As SAPO, they regard the fact that they achieved an unqualified audit as a non-financial but substantial achievement. It was the first time since the Auditor General (AG) took over that they had done that. As his mother had taught him, it did not matter whether your clothes were fashionable, as long as they were clean and as SAPO, they were aiming and were well on their way to achieving a clean, well-organised organisation. They had to move on from that.

All indicators had improved, such as the decline in irregular expenditure. Mail delivery had improved. He  gets daily criticism both publically and privately. Even though 87.1% of the mail had been delivered, it was the 13% that make a noise, and they were entitled to make noise. He had recently received a letter from someone stating that his mother was pleased to receive her 90th birthday gift from her daughter in Australia, the only issue was that her birthday was in June. SAPO understands that, and would talk about what they were going to do about that later.

With regards to labour, he argued that they had a relatively stable environment, given the conditions in the company. They had two years of zero increases, and had succumbed, if you will, to a 6.5% increase this year. Part of that agreement was to look at rescuing the optimisation of the staffing structure. The two go hand in hand, and they hope that that would not have had too big of an effect. Since his term in office as CEO, the numbers in the post office had reduced from something like 20 800 to 18 100 now, about a 10% decline, which had been primarily a natural reduction after the warrant packaging services.

The digital terrestrial television (DTT) project was all up in the air at the moment. SAPO did not see that as a complete elimination of that income stream, they just see it as taking a different form. He thinks they had all heard enough about social grants, suffice to say that formally last week the inter-Ministerial Committee (IMC) sat for the final time before the Constitutional Court deadline. SAPO was not required to go to the Constitutional Court for an extension, and the IMC had passed a judgment on their ability to pay and deliver on social grants and they had passed the test and they had said that publicly. It was an extraordinary test as to whether SAPO could get something done -- given the resources to do it and the imperative of getting it done. On those two points, it was important in general to decide whether the resources available to government generally should be invested in an organisation such as SAPO, or not. Once that decision had been made and the output was visible, they start attracting that investment and that becomes the solution. He would argue, therefore, that for the first time if one starts looking at SAPO’s forward projections on income and include something like the SASSA deal and include the client base that comes with it, one starts having the basis for proper capital investment and not just catch-up investment. That was read together with the social mandate being funded, and they await the medium term expenditure framework (MTEF) pronunciation on that this month. It starts changing the colour of the organisation in terms of its “investability.”

There were huge pieces of the market, such as Korea, and other competitors who were out there such as PostNet and so on where, if SAPO had the right investment, they could out-compete in due course. They now had the forward income profile, and they also had a lot of clients now. He tries to reflect on the metrics of the Post Office, other than just as a post office, and he would argue that SAPO had anything between 25 million and 30 million clients. People that go there to renew their motor vehicle licences, people who go there to pay and pick up social grants, people who use the post office any way, people who use the banks and so on. SAPO must have one of the biggest client bases in South Africa. The issue was, what one could do if one had the largest footprint and the biggest client base. Those were the kinds of metrics that SAPO had started to think about in the post office.

The change and the high profile of what they had to deliver required a fundamental change in how they culturally managed their people assets. They had to move away from an environment of discipline to an environment of incentive. They had to cross the bridge and be clean and properly behaved, but once they were, it could not be the only measurement whether they complied -- whether they had performed had to become the measurement, and it had not been.

SAPO was now on the verge of wanting to attract some serious individuals into their organisation and those individuals would not come unless there was an incentive. Even the chairperson of the IMC, supported by the Administrator of Labour, had said that they could not understand how SAPO had not been asked for bonuses and other incentives for delivering on SASSA. They were right -- people had delivered extraordinarily on SASSA in six months, which would had resulted in huge financial incentives for that delivery in a normal commercial firm, because the delivery fundamentally changed the income statement(s) and balance sheet(s) of the group. SAPO had to move and accept now that just passing and not getting into trouble was not what they were about. They had to move to an organisation that said “perform and you will be rewarded and your life will change.”  That was what they really needed to start thinking about now and that also meant he was starting to see people with big deals and big possibilities. The reception had fundamentally changed from what it was last year. SAPO had to change their culture from being a responsive organisation that was trying to stay out of trouble, to a growing organisation that had ambition. That was a cultural change and SAPO had quietly changed 60% of their executive already, and they see attracting new blood requiring a different dynamic.

With regard to the financial highlights, the revenue continued to decline on a volume basis by about 10% after it had increased by about 5%. Other things had declined in accordance with that. The capital position remained very strong because they had had a R3.7 billion capital injection. They had only R400 million of borrowings in their balance sheet, which in a scheme of state-owned enterprises was a small number, but they were going to be getting more as they started funding their own growth and capital expenditure plan. SAPO believed that there was time for a “sea change” there now, and did not believe that it was appropriate to use government guarantees to borrow from private sector banks. Government should guarantee the Post Office, and the Post Office should issue its own long term capital instruments. Borrowing short term to fund long term never worked -- it was imbalanced. They want to get back into the bond market, because they essentially sit with idle capital inside the Post Office and they borrow at very high rates. That was a cost to the fiscus which could be a benefit to the citizens of South Africa, rather than to the main banks in South Africa. They would wait for some of that discussion to develop.

In terms of the income statement, the financing cost of R300 million would had gone down quite substantially due to the borrowings having gone down for the time being. One looks at the numbers and says “so what,” but a 17% decrease in operating costs was a big number in a 5% inflationary environment. Therefore, these were not just natural shrinkages, but were efforts put in by people such as SAPO’s Chief Operations Officer (COO). SAPO’s financial position was not the focal point -- they had a lot of assets -- and it was the productive use of those assets that they wanted to focus on. SAPO had a lot of properties and they were not in the property selling business. It was a cornerstone of their differential competence that they were represented everywhere, and SAPO holds on to these things in its balance sheets.

Even deposits were increasing by the general public. There had been a 3% increase in the number of deposits in the Post Bank, with only a 1% increase in the fund which means smaller and smaller deposits were coming into the bank, but they were still growing. To grow deposits by 3% was quite significant in a population growth which was now around about 1% worldwide.

The number that was the most worrisome was the capital expenditure of R44 million. They could not, in an organisation like the Post Office, hope to get into the real world in which they compete if they were only spending R40 milllion, R50 million or even R500 million on capital, but they had to prove themselves to be an investable case, and had to have present net values for their investments. SAPO had to show the rates of return that could be generated and they had to get other kinds of capital. It should be self-evident that the investment coming directly to SAPO as a result of the SASSA mandate was capital, which goes straight into the organisation. It was real capital, it was not debt. Liquidity remains a concern and that was because SAPO was running at an operating loss before SASSA. In the next financial year, they would start to see the liquidity challenge going away because those cash flows, if they do nothing else, would mitigate the operating losses that they were making in SAPO.

Just in case the Members were not familiar with the numbers, this month SAPO had paid out some R8.5 billion in Social Grants to some 6.7 million beneficiaries, which was about two-thirds of the total beneficiary base. It was SAPO’s view that all informed beneficiaries would swap to SAPO because they were cheaper and as good as any alternative. SAPO’s challenge was to retain their role as an infrastructure player when they moved to a cashless society. SAPO fully supports the notion that cash is a difficult, expensive and dangerous medium of exchange. There had been extraordinary increases in robbery and things of that nature because it was known that cash was going to arrive at the Post Office on a certain date, but it was not an issue restricted to the Post Office only. The level of sophistication and the level of aggression, violence and robberies in the country had escalated to a point where it was borderline terrorism. SAPO did have, as an organ of state, close and intimate cooperation with the South African Police Service (SAPS). SAPO works with them and they were proving to be a good partner. They still outsourced some security.

In terms of key performance objectives, they still languished below 50%. It had been made clear that this was a very difficult thing to defend, because when one goes into the detail behind it, one finds that for example on some of the revenue lines, with 95% of the target they still get zero. In some ways, SAPO needs to reconfigure how they present this so that it did not become as binary as it was now. He had never received 48% for anything in his life and was hoping that the situation would change.

He would not get into detail about the MTEF submission, but the CFO was present and could do so if necessary.  With the public service mandate, there was a sea change when they called it the right thing. They used to call it the universal service obligation (USO) obligation and no one liked that. Now that they had called it what it is, they were anticipating support for that, and it was not holding their hands out, it was delivering a service enterprise. This was not something he would like to see in the Post Office income statement -- it was a cost recovery for a service that they provided at the instance of government and had a social basis to it.

What was going to happen to DTT exactly was a question mark, and how they were going to reconfigure the economics of that he could not speak about yet. SAPO needed funding to pay off its R400 million overdraft which matures in a few months’ time. They still had a creditor problem which was self-evident there, and then there was going to be R1.9 billion, of which they had already been advanced R541 million, invested in infrastructure. That was the first piece of real capital that had gone to the Post Office in ten years that had not been used to pay for the past. They would see new consequences from that. They would see a change in the physical and technological structure of the group as a consequence of that coming in.

With regard to the audit findings, he had spoken about SAPO getting an unqualified audit. They had not been helped, but they were certainly encouraged. They were driven by the Auditor General (AG) and the chairperson of SAPO’s audit committee to achieve that target. It was SAPO’s imperative to come with an unqualified audit, and it took a lot of work from people who were not used to working at that pace to achieve those ticked boxes. They were proud of it and they would never look back. There were still a lot of lists and the Chairperson had asked SAPO to prepare a detailed analysis according to the AG’s announcement. They had it with them and could give it to the Members and talk to it, or just hand it out to them. It had every single number in it, and he would talk to it in the end.

They had had a changed mind-set and as Members would know, they had also had a change of their Chief Financial Officer. The real issue was the changed mind-set. They had a new committee called the MLAP, and he was sure other state-owned enterprises (SOEs)  would adopt it in due course as the industry standard. The MLAP was chaired by the Chief Operating Officer, and they would never go back to that other world where they did not have a clean audit, because that was something they could control. They had got a long list of things to do and they had done about 70% of the things that they had been asked to do after the audit.

Under audit findings there was the strange finding of critical vacancies, which was an issue at the Post Office. About two or three and a half years ago, maybe 10% of the people who worked at the Post Office felt that they had a reason for being there and were motivated and wanted to do things rather than to just have a job. That number was about 30% now, but it was nowhere near 50% or 60%. This was because SAPO did not have efficient and incentivised leadership in the operating structures of the organisation. The culture of an organisation chooses who it hires and fires, and what they do in their work, not the CEO. He had recently signed about ten new appointments at middle-management level, which were packages in excessive millions, so it was expensive, valuable people that they had employed. They were starting to get the right people being prepared to go and work for SAPO. That was what was going to solve the problem. They had 50 of those people working in the organisation who themselves could create a mini environment of properly motivated people who had the prospect of economic dignity in front of them.

The objective was to eliminate irregular expenditure. The sort of irregular expenditure that they were incurring would not be irregular expenditure. SAPO’s irregular expenditure was procedurally irregular, not fraudulently irregular, and there was a difference in his view. Nonetheless there were rules and a decrease was visible, and they were going to do that and continue to do it.

Regarding the outlook for the new year, the finalisation of funding mechanisms would be announced next week. They could put a tick next to that, as they knew where they were going and would wait for next week. He put a tick next to the operational infrastructure that supports the payment of the social grants system, because by definition it had to function. There had been a total of something like R3 billion which was invested into SAPO’s infrastructure in order to deliver that service. He did not want to speak ahead of himself, but SAPO had been approached by two government services for the first time to do their work as well, on the back of that infrastructure upgrade.

E-Commerce remained a pipe dream, and he put a cross next to that because for SAPO, it was about choosing the right partner, and they were being courted and were being cautious while being courted. It was a general thing that they had to guard against -- for the first time in his tenure as CEO, SAPO had had an interesting series of cash flows and was being courted more than they should be. People were approaching SAPO enthusiastically to do all kinds of deals with them and they were very cautious and aware of the fact that they might be seen as a cash flush organisation. However, they somehow had R180 billion that flowed through the system. With E-Commerce, they had been approached by two or three major players and that decision had to be made this year. They could not not be in it -- it was a serious money spinner.

He said that he puts a tick next to labour, and was grateful to labour. SAPO had an extraordinary relationship with labour. They put up with a lot, and he thinks they understand and see a new world. SAPO was straight with labour -- they were honest with them and he speaks to them at least once a week. They all understand what is coming and so far they have been delivering on some of the changes in the environment which make them feel a bit more comfortable.

He had spoken already about creating an efficient performance organisation. It was not in their culture and they had to make tangible and visible changes to introduce it into their culture. The one place where he puts a huge cross, negative, was next to SAPO’s customer experience, as it was just nowhere at the moment --their customer relationship management, their call centre management. The technology support was one thing, but attitudinally out on the frontline, at their call centres and so on, they were not where they wanted to be by any stretch of the imagination. He put that as a top priority for this year because he was still personally receiving 300 emails per day, and that was a lot. There was a cross next to that.

With the corporatisation of the Postbank, things in the banking sector were not looking rosy at the moment. This was a National Treasury (NT) discussion more than it was a Post Office discussion as far as they were concerned, and SAPO was in discussion with NT. He was not sure whether all of this would pan out, but for the time being, the absence of a fully-fledged banking licence did not prohibit Postbank from growing and doing extraordinary things in transactional banking. SASSA was a transactional channel -- they did not take any credit risks and the deposit base was growing and the flow of funds through SASSA was growing. So Postbank would grow and he hoped that one day they would sit and say “this was exactly how they were going to manifest its role, as a bank that was owned within the State.” That debate was fairly broad, but also fairly urgent now, and he thinks that it has the support of the new Minister of Finance.

 

It was not that SAPO was looking for equity partners, but they would not attract the right partners into some of the streams that they wanted to grow. Unless partners got a share in it, they just would not do it. So SAPO -- and this was in the State of the Nation Address last year -- expected the public partnership debate to grow, and SAPO expects itself to be fertile ground for that.

He said that that was the end of the formal presentation, but there were various important other aspects to it, particularly the performance information, but he would end there and see if there were any questions relating to the results and everything tabled in their report. He would be guided by the Members if they wanted SAPO to get into more detail.

Discussion

Mr C Mackenzie (DA) said that he was grateful for the clarification on the universal service obligation, and said that the social mandate was a part of tha,t because they included social mandate. So from now were they planning on calling the Universal Service Obligation, the Public Service Mandate? Was that the term they want to coin for it?

He asked if the 87% of mail that gets through was within a specific delivery time. He was a little bit concerned about the Pinpads for the SASSA grants. The CEO had been very confident when he spoke about the SASSA grants from the Post Office’s side, presuming they had nothing to do with the SASSA offices where there had been a little bit of bad publicity. When they rolled out that information technology (IT) system with the Pinpads, which they state had “hardware and software errors,” surely when trying out a new system they pilot it, test it and stress test it to see if it would fall over. How widespread was the Pinpad problem?

In terms of their whistle-blowing hotline, how many whistle-blowers had complained in the year under review?

The SAPO report talks about twinning projects with the Commonwealth that the Post Office could tap into. Could they give an indication of what some of these projects were?

Regarding the attendance of board meetings, Mr Robahale had attended nine out of 15 meetings, presuming that 15 was the number of meetings that he was supposed to attend. Could SAPO explain this?

On the Public Service Mandate, could SAPO give the Members an idea of what government was thinking of in terms of subsidy? Throughout the report, they had talked about R800 million that they were looking for -- was that the subsidy they required? Why was it so high, compared to the previous subsidy, which was around R250 million a year?

He understood from their opening remarks that they had taken some steps to address the vacancies, but when he looks at their vacancies for 2018 with 25 out of 59 approved positions vacant at the top management level, it was no wonder the organisation was experiencing difficulties. The same applied to 214 senior management out of 474, 234 specialists out of 387, and 1 168 skilled employees out of 3 005. He was amazed that they could effectively run an organisation with this kind of staff deficiency. What steps were they taking to address that?

There had been a 54% variance over the previous year for working extended hours and overtime. Was this because SAPO did not have the staff and the existing staff had to put in those kinds of hours to achieve the organisational objectives?

In the AG’s report, an amount of R326 million had been disclosed as contingent liabilities. Could they give the Committee a bit of a background on that? What liabilities were those? The Auditor had been quite damning on the leadership of the organisation. He had said “the leadership of the entity did not adequately establish policies and procedures related to key finance processes, did not implement standard operating measures raised in performance reporting, did not timeously implement effective human resource management, no performance management system was in place for employees.” For him what was most damning point was where he said, “the numerous material adjustments in submitted financial statements and performance reports were indicative of a lack of a proper review process by leadership.” It went right across the page. Were they taking steps to address these deficiencies because they seemed to jump out quite clearly for the Auditor?

Under consequence management, disciplinary steps were not taken due to a lack of further investigation at the business unit level. Were they implementing disciplinary action based on the people identified in these reports and could they say what disciplinary steps they were taking against members of staff?

He shared Mr Barnes’s concern over the capital expenditure. In fact, when he looked at the amount that Broadband Infraco (BBI) was spending on capex, they were spending the same amount of money, and BBI was a fraction of what the Post Office was in terms of size.

There had been reference to the SASSA contract changing from a five-year billed operating transfer to being wholly-owned. Did this mean that the Post Office would keep the system in-house? What had led to the change of that model? As he understood it, SASSA would eventually own the system at the end of the day, and that had now changed.

On the same page of the report, just below the SASSA contract, net revenue was R2.6 billion over the next five years, which was about R600 million a year, which was not going to meet their operating loss. He understood that SASSA was actually going to get them out of a hole. What steps were they going to take in a market where their mail volumes were declining, where the revenue from mail was declining, to make up that difference? They were all tired of seeing the Post Office constantly getting bailouts from the government. 

SAPO had various properties in several towns, all of which were PTY LTD entities. He presumed that they all required some audit of performance, because there was some sort of cost attached to them. Why did they not have one central property holding company?

According to the report, SAPO was given an income of R4.5 million. Where did that come from? They had dividend revenue from unlisted financial assets -- what were those unlisted financial assets?

Ms M Shinn (DA) said that Mr Barnes was very optimistic about the turnaround of the Post Office pending liquidity, which was great and they welcomed that. However, as mentioned by her colleague, throughout the report leadership was criticised in all of the findings. Was that tied to what he had said of 60% of their executive having changed in the past year or so? Was that a consequence of the poor leadership? What kind of jobs had changed hands at that time? She thought a 60% change of executives in a year was indicative of where or much of the rot in the Post Office was.

In the report, there was reference to the annual licence fee to the Independent Communications Authority of South Africa (ICASA) of 0.55% so that ICASA could protect SAPO’s postal deliveries. How much was that in actual money terms? Obviously it would not make an overall difference to their cash flow, but it would be nice to know whether there had been any discussion about getting rid of the fee to ICASA, and anybody could deliver letters.

Apart from harping on about leadership failures by the AG, she was concerned about the issue of the enterprise being a going-concern. Either something really radical was happening between when the AG had done their books and now, because they repeatedly talked about it being a major concern.

She referred to properties not recognised at yearend, and the split between Telkom and the Post Office where some assets were not allocated to either of the entities. What assets were they? If they werebuildings, what were they used for? Was any rent being gathered on them?

Ms N Ndongeni (ANC) asked what SAPO’s plan was to clear the backlog of mail and parcels? How would they attract business for the December period, because December was the traditional business season? Could they give confidence to the public that they would receive their parcels? Could SAPO give the Members a briefing about the infrastructure in their offices?

Ms J Kilian (ANC) said that if Mr Mackenzie would had gone as far as page 189 of the report, he would had seen the list of contingent liabilities, but perhaps he just did not reach that page.

With regard to the Universal Service Obligations, the problem lay with the legal terminology used in the Electronic Communications Act and in the SAPO Act as well. What was good about the “new” term was that it actually unpacked it. The Universal Service Obligations was such a difficult concept, and even if one engaged with National Treasury, they found it difficult to understand. The fact that they had unpacked it, to make it a public service or the social responsibility of SAPO, made good sense.

What the Members had before them was a story of the good, the bad and the ugly. What was good about SAPO’s story was the sustained implementation of specific measures in very difficult circumstances, and that had in fact contributed to SAPO making the turn. They could harp on the negatives, and she had noted the concerns raised by the AG, but what was interesting, and she thought that was the challenge for the Post Office, was that it actually had to compete with business but was a state-owned entity. It was therefore, to a certain extent, restricted in its ability to move because it must function within the Public Finance Management Act (PFMA). This was a public-owned entity, and it must report in terms of the Public Service Responsibility Codes, and it must abide by National Treasury regulations and the PFMA, and all of that.

What she did not understand, was the reference to the issue of human resource management and critical vacancies in the report. What she read indicated that there was certainly a firming up on consequence management, as it said there were dismissals, there were end of contract terminations, etc. Also, as far as the nature of disciplinary action was concerned, they had verbal reprimands, verbal warnings, final written warnings, and they were going through the Labour Relations Act. The difficulty was that the AG did one of two things -- he either conducts a regulatory audit, which was when all three forms had been completed, the pink form, the yellow form and the blue form, and if this was not done, there was a little cross next to one’s name. Sometimes it was the little things done that collapse an institution, so she did not want to discard the need for that. In the end however, a performance audit, which could also be performed by the AG, was actually what would turn the tide for the Post Office. It had to be incentivised, however, if they wanted to attract the right calibre of people, and if they wanted to build a growing organisation, that was the next step. The first one was to deal with consequence management effectively and strategically.

She did not understand the AG’s statement that in some instances disciplinary steps were not taken against officials. Was it because it involved prior year irregularities? Were they maybe just given written warnings? This was because one could not really take firm disciplinary measures if there was a long lapse of time. Could they please explain what that referred to?

The issue of policies and procedures was a concern in terms of the leadership remark made by the AG, but it should be seen in the context of where the SA Post Office was and where it was moving to in the past financial year. She did not want to be harsh, but just needed clarity on what that could refer to.

Mr Barnes and the COO could indicate to the Members, as declining mail was a global phenomenon, what steps other postal agencies had taken in other jurisdictions to maybe adjust the business model. They had referred to E-Commerce -- it had not taken off, but it could obviously be one of the issues. She had recently visited the Netherlands and the courier service there through E-Commerce had been very effective. People do online shopping and it was delivered within 24hours. Was adjusting the business model a possibility?

The Chairperson said that he appreciated the work that the Post Office was doing. Having walked the journey with the Post Office, albeit short, he was less worried about what was contained in the report. He did not underestimate the work of the AG, but leadership was indeed a weakness that was getting attention. One would assume that just the indication of 10 or so people being employed at the management level tells a very positive story. What it means is that the few people that were there were able to pull vehicle to where it is. He was not concerned and did not hve sleepless nights about it.

In his informal engagement with the AG, when they had raised the leadership issue, he accepted that they took it as a concern, but personally he thought that they had the strongest leadership ever in the Post Office. He was not worried because the SAPO team was at work, and one would find them everywhere, communicating. He was yet to see another CEO from another entity on the streets with the people, engaging on matters concerning them.

The Chairperson suggested that Mr Barnes buy the book titled “The Goal,” and other books written by Eliyahu Goldratt, an Israelite author. It would be a very beautiful read for the SAPO team. The author was a supervisor on operational management, and had advised some of the biggest companies in the US as to how they should run their operations. What they were dealing with in SAPO was managing the operations, strengthening the weaklings and that was what he had seen happening because the chain was as strong as its weakest link. What he had seen was that every time they came across a weaker link, they gave it more welding, strengthening it continuously and that was how one builds a formidable entity.

The only question he thought Mr Mackenzie would have raised in his question concerning the Board member who attended nine out of the 15 meetings, was that 15 meetings were quite a lot. 15 per year was quite high but understandably necessary because they were dealing with a situation and they had a very competent company secretary who knew the King IV report on corporate governance in and out before they issued it.

Ms Kilian said that what she wanted to say was related to the book referred to. Her issue was that if they looked at the AG’s assessment of SAPO’s performance criteria and the standards that they had set, she would advise them go back to the drawing board and simplify the package to say what was going to take them to the next step, so that they could really focus on that. She had seen a lot of public entities where they had listed all the steps as goals and then realised that some of the steps were not really necessary but they had to keep them, which had resulted in a cross behind their name. The next phase would be for SAPO to sharpen their pencil to say, “this is now the next phase.” SAPO needs to look very clearly as to what they want to set for themselves as performance standard goals to achieve over the next five year period. They must not fall into the trap of having a whole host of steps that were actually irrelevant. They needed to look at what made a business a successful business.

SAPO’s response

 

Mr Barnes said he would start with the matter concerning the critique of the leadership. Leadership was a collective noun that had been overused in that paragraph. Looking at SAPO’s Annual Report, there had been changes -- the acting Managing Director of the Postbank was still in place, but the CFO had changed, the Group Executive of Governance was gone, the COO had changed, the Group Executive of Human Resources was still there, the Group Executive of Sales was gone, the Group Executive of Information Technology was gone, and the Group Executive of Strategy was gone. All but two of the director posts had been changed, or were no longer in the organisation. He did not want to say that they had done that purposely to react to the leadership problem, but leadership had changed and this had been a consequence of the criticism, which was valid. At the top of the organisation, almost 80% of those with the title Group Executive, which was the most senior title, were gone and had been replaced. They had done something about it.

Public Service Mandate was the correct definition. The Universal Service Obligation was an international definition and did not have the same meaning as it had in South Africa. It was important to talk about it, given the volume of work that they do and the geographical dispersion that SAPO had to cover. This was not Germany, so they had to define it as a specific mandate. To deliver post to Mthatha at R4.20 a letter did not make money, but was a necessary service.

The 87% was 87% of post that was delivered on time, according to the standard. The best post offices in the world were at 98%, and SAPO’s required standard was 92%, but they were 87% on time. He wanted the COO to talk about the backlog issue as she was on that, and SAPO had never had a more direct ownership of these problems since the new COO had taken charge. They were on it.

Just to explain the backlog, SAPO found themselves in April not paying creditors, so the people that supply them with the trucks, bakkies and forklifts took them away, and closed 75% of SAPO’s branches, putting blocks on them. Not only could they not deliver to mail centres, they could not deliver to post offices and post boxes as well. That was the real cause, compounded by the two week strike. The real cause was that they did not pay their creditors, and they almost came to a standstill. They did not have money to pay the suppliers, which resulted in an accumulation of 46 million pieces of post, which was now down to about 12 or 13 million. They were processing at a rate of about twice their daily influx, so they should get there at a particular point. The issue was that it was manual -- the extra effort was all manual, and they were taking people who were otherwise doing other things on a Friday and getting them in there to start sorting. There were streams of mail, and they had to make the judgment call, and magazines were the cheap mail. Lower rates were paid for magazines, much lower than letters their size, so when there was a mountain of magazines there, they had to wait their turn -- it was the economy class of postal services. They did not queue in the priority lane. They prioritised to do letters first.

He believed they would catch up. The Member had spoken of December, but it started now -- the Christmas mails had already started in October. SAPO’s season started now.

He did not know how many whistle-blowers had complained.

SAPO’s membership of the Universal Postal Union (UPU) was important, because they believed that they should think about integrating post offices technologically. When they were a big enough organisation, they could start thinking about their own internet. They did 3.3 billion articles of post per year and they would have the seen the videos of those people that were leading the technology with robotics and that sort of thing. That was why it was important, as they needed to leverage off that.

Regarding the meeting attendances, some were committee attendances, not full board meeting attendances.

They had qualified the Public Service Mandate money exactly, and the cost was not out of line as it might appear. The last time SAPO had received a Public Service Mandate had been in 2011. It had been about R300 million, and if inflation was added it amounted to about R500 million. Therefore, the number that the Members were looking for was R773 million, which was not far above the inflated number that they got. SAPO was not planning to ask for a chunk of money, they were looking at it as a cost recovery.

The vacancies and the vacancy ratios were reminiscent of the old Post Office structure. In his view, some of those structures were there to be populated, the more the merrier. If one could create ten positions, one then became ten times more important than if one had one position. It was wrong, the numbers were wrong, and the vacancy structure was wrong for the organisation they sought to become. That was the truth of it. They needed to rewrite the metrics and not comply with them, because they were fundamentally wrong. It was the same with performance -- they needed to rewrite their key performance indicators, rewrite their optimal organisational structure, and rewrite their remuneration policies. This was not to comply only with government, but to comply with a competitive environment. SAPO would never get out of the trenches if they could not have the top people to work for them. The people that SAPO needed were not people that needed jobs, but were people who needed to advance their jobs. There was a big difference.

Contingent liabilities may have been answered, but they had the answer.

If one looked at the MTEF submission, SAPO was planning R2.6 billion of capex over the next three years -- R900 million this coming year, R1 billion after that and about R750 million the following year. In addition to that, there was another R2 billion that was coming from SASSA as funding of their upgrade and the integrated grant payment system, which was a universally applicable payment system and could be leveraged to pay things for government. They had already been approached. They had built a system and if one wanted any payment to be made to someone who was a card carrying member of some organisation, be they a social grant recipient, a pensioner, a member of this or a student etc. then SAPO could accommodate all of those numbers -- they just add on, they had the capability built and paid for. If they added up all of those, they were looking at a forward capex profile of something like R4.5 billion. That was what they needed to spend. It was not what would take them to a comparable state, but they could not use Europe and the fancy places they see in Asia as comparisons. They did not have the population density and they did not have the Living Standards Measure (LSM) demographics.

As they were currently constructed, SAPO did not have online shopping as the principle driver of their economy. The COO had been on a global conference on IT, and she had come back stating that she was depressed, because technologically SAPO was so far behind. However, they had to be careful, and needed to measure what was applicable to them. They could definitely take back the market share that had been taken from them and they could for sure deliver those services at a lower unit cost than the private sector was doing.

The transfer model had been changed unilaterally, guided by the Chair of the IMC. It made no sense for an intergovernmental arrangement to have a limited time period -- if it was working, why not just keep going with it? This fundamentally changed the economics of that deal for SAPO, because they were now building an asset which they could harvest in perpetuity rather than an asset they would have to harvest in a five year period and then hand it over. It did not make sense. Subject to SAPO’s performance and the service level agreements (SLAs), it had to be signed by the end of this month. Subject to their performance, which was very accurately and precisely defined and the economics which were very well overseen by the National Treasury, if they did their job they should continue to do it forever. This validated the investment case -- one could not make the same investment that one had to recoup in five years as when one was making an investment in perpetuity. That was the logic behind that.

They had looked at the situation many times and probably would end up with a property holding company that could do things. Almost every three months, a property company approached SAPO saying they could restructure their property, but they were not going to do that because the companies wanted to do a sale and lease back.

They had started to engage with ICASA. For the first time since he had been SAPO, their so-called competitor, had approached them to do a deal, which he did not think was legal, but maybe that was progress.

He did not like the description of the Telkom assets. They had places where SAPO owned the building and Telkom owned the area -- so whose property was it?

Ms Lindiwe Kwele, Chief Operating Officer (COO): SAPO, referred to the Pinpad issue, and said SAPO had not really invested in the branch infrastructure for many years. They were still operating with XP, and also had to upgrade to Windows 10. The Integrated Grants Payment System (IGPS) system needed to be integrated into their web repost, to enable the point of sale transaction capabilities over the branch. That had since been addressed. In July they had had huge technical glitches, which they had subsequently addressed. Their infrastructure rollout and the network applications that were supporting it had since been resolved.

Regarding SAPO’s partnerships, she would focus on their relationship with the UPU, with the specific focus on the World Customs Organisation as well, where they look at customs declarations, as well as the integrity of the industry and the lobbying around common regulations. This was because most of the post offices in the West actually bully their way into the inbound and outbound costing model. Therefore, SAPO had to be part of the global partnerships in order to be able to influence the policies and regulations around the costings. Also, there were international agreement to facilitate the movement of postal items across borders in partnership with various aviation partners, as well as customs security. SAPO’s partnerships, therefore, were around their core business and the core development of technologies to compete on a global scale, the issues of IPMS and the International Postal System (IPS), because they had to enable their customers to be able to trace their parcels from cradle to grave. Customers wanted to know where their parcel was from the source to their doorstep, and obviously that included huge investments on SAPO’s part. Others were already funded by the UPU, so they had to tap into the Quality of Service (QSF) fund to enable them to partner in that regard.

To clear the postal backlog, they had introduced Operation Kuka Maoto. Due to the strike, they had focused on Wits Post and Tshwane Mail, because that was where the bulk of the mail was, but there were certain dependencies which needed heavy trucks and forklifts because people could clear the backlog on the shop floor but needed the trucks to transfer the parcels and letters. That required some investment, so they were a bit challenged in that regard. However, with the clearing they had been constantly communicating with the greater South African public in relation to where they were around their eradication of the backlog.

Where the ultimate goal was, was to really look at the entire business re-engineering, supported by state of the art technology, to be able to get SAPO on a par with their partners. The Board had approved their logistic strategy in which E-Commerce was going to be the catalyst for their operations reform, and they believed that that would also help resuscitate their lost market share within their courier business. This was because they would actually drive all logistics support within the E-Commerce process. The sooner they kick-started that the better. They were also in talks with various partners, as the CEO had indicated.

Knowing that there was a huge decline in the mail business globally, they were exploring other products that they could offer as the Post Office. Money transfer was one of them. They were already exploring that with the Southern African Development Community (SADC) market. Mobile money was another thing that they were exploring. They had spoken about SASSA cash payment being one of the most expensive and unsafe methods of payment, so they had had to explore mobile money. It would take huge and intensified community awareness programmes, because it was also about changing the mind-set and behavioural patterns. Those were the type of things that they were dealing with, and the courier service. They were going to be working closely with SITA around the government clout, in their quest to attract other government businesses. The infrastructure that SAPO already had on the integrated grant payment system could enable them to also render the service to the Unemployment Insurance Fund (UIF), the National Student Financial Aid Scheme (NSFAS) and other potential businesses. It really began to reinforce SAPO’s positioning to use the 30% market share from the government perspective.

The matter about delivery standards was about delivering on time, but for SAPO to be able to do that, they needed the entire end to end process from an operational efficiency perspective. They needed to know that the people process technology was intertwined to ensure that while everything was happening on the shop floor, they had introduced productivity to measure performance on a daily, weekly and monthly basis, to ensure that they were driving their performance to meet regulatory compliance.

She was passionate about the performance management framework. SAPO had acknowledged that they were measuring the wrong things. They had changed all of that and in the new financial year they would begin to see huge improvements. Some of their indicators were not “Smart,” so they were also looking at the Smart indicators. The CEO had already touched on the matter of consequence management around the management of performance, and SAPO had a financial misconduct committee, where they were dealing with the curbing of irregular expenditure. On a daily and weekly basis, they were zooming into their control environment across the board, but it did not help if it was sitting at their level. They needed the managers to really take an interest and appreciate their environment in terms of introducing various internal control measures so that when it was audit time, it was not just about compliance, but that people had their audit file ready for the audit. They were inculcating that ethos, institutionalising it as a way of life, as a part of their governance framework. As far as she was concerned, they were really pushing for an unqualified without matters of emphasis audit opinion, and were hoping that it would come sooner than later.

Mr Jabulani Dlamuka, Acting CFO: SAPO, said that concerning the matter of the contingency of R240 million, there was only one matter that applies and that was their previous lease agreement which they were challenging and had terminated. The rest related to the non-payment of the service provider. The other issue was the quality of financial statements, and they had focused very diligently on that. The issue of vacancies remained a challenge and they had non-qualified people in key positions, but as the COO had said, they were filling those positions.

Despite the R800 million loan from SASSA to achieve profitability, it was definitely not going to be SASSA that was going to turn their books around. SAPO still needed to deliver on their mandate, which was about providing postal services. A lot of investments were needed therefore, and as the COO had said, they were looking at about R4 billion over the MTEF to actually look into the issue of postal services, and also sales, so that they could  diversify their range.

The dividend was coming from two centres. SAPO had a 4% share in Centriq, which was their internal insurance provider, and which was the majority of the dividend income. It also had a 1% holding at iThuba. Those were their privately held investments.

Mr Comfort Ngidi, Chairperson: SAPO Board, said the Board was satisfied with the turnaround and the attendance of Board members. As a result of the previous pressures, the Board had had to increase the number of meetings. This was because a lot of work had to be done collectively -- they had had to collectively persuade the Committee to give them the SASSA opportunity. The Post Office had never had people fighting for it, and for a change they had Board members and management fighting for it. Some people did not get excited about that because the Post Office used to just accept and agree to anything that came their way, but this proved a lot.

A policy decision on the state bank matter needed to be taken, and the Committee needed to assist SAPO in grappling with that. There were challenges, but it had to happen. SAPO went out to commercial banks and borrowed at 10%, whereas there was extra cash at the Postbank, if not needed, which derived 4%. The question was, were they not enriching the commercial banks at the expense of SAPO, when the group had extra cash sitting at the Postbank, according to the Reserve Bank? It was a policy decision that they would leave with the Committee to assist and decide on in due course.

The Chairperson said that he guessed that they now had a shrewder Finance Minister. One of the reasons they had had challenges with the licence of the bank was that they had feared that VBS would actually happen to the Postbank. It had been a real concern of National Treasury. This development may actually not work in favour of the journey that they had already travelled. The VBS development was not a good one. The Committee had raised the matter with the Minister of Telecommunications. The Minister had given them an impression that there had been a discussion between the Department and National Treasury, and he could not remember who had been upset about it. There had been money lying there that could have been used and repaid if need be at a cheaper rate, but they were bound by rules to go the expensive route and then get criticised for being uneconomic. Those were rules that were highly regulated in government. He hope SAPO’s engagement with the Minister would be fruitful and they as a Committee would also engage at their

Mr Mackenzie said that SAPO had not answered the question about their properties. Why did they have six of them in one place? Did the Post Office not own the Rissik Street post office, that magnificent building in central Johannesburg? If they did, what steps were they taking to restore that priceless piece of Post Office heritage? They also had not answered his question about the variance in overtime. Why did they have those overtime rates? Was SAPO making use of services offered by SITA? To what extent was SITA looking after their IT infrastructure. Mr Ngidi had made reference to a state bank, saying there was a small paragraph on micro lending in the report and the Postbank’s potential capacity for that. He had also referred to partnering with other banks, and he would like them to expand on what the thinking behind this was.

Mr Barnes said that he thought he had answered the property question. Some of the properties were historically held in companies, and some of them were on the balance sheets -- SAPO thinks that they should all be. There was a tax advantage with holding them all at one centre, and then charging them a rental because there was a tax loss at the centre. The intention was to hold all their properties on the balance sheet. Why some of them were in property companies he did not know -- it was historical, and there was no sense. They would seek to change it, subject to tax and costs, because when transferring properties there was a huge transfer cost.

They did own the building in Rissik Street and many other fabulous buildings such as Church Square,e which was empty, but at least they were not sitting in Centurion anymore.

Ms Kwele said that their relationship with SITA was not tapped into because they were a state entity, but they had come through for SAPO when they had glitches around hosting their data centre. They believed that SAPO had to be part of the Government “cloud” and the project that they were undertaking. SAPO also understood that they had been playing a role within the E-Commerce -- the G-Commerce -- but they were working on building some capabilities in the E-Commerce space, so they would be exploring all of that together. What they were focusing on right now, however, was the Government cloud and the cloud fusion component which would assist them to leverage and achieve efficiencies.

With regard to the overtime, SAPO had had to accelerate the backlog eradication, which meant that other people had to work overtime. What they had also picked up was the lack of internal controls in other environments because they did not have an automated process on management information systems (MIS), which was something that the CFO had graciously agreed to fund so that one could be able to have a holistic view across the entire country. The productivity and the management information services and the dashboard in terms of reporting were being curbed, and a reduction would be seen in that regard, because other people would tag along during the day and then just before they knock off they would start working so that they tapped into overtime. SAPO had picked that up and nipped it in the bud, so they were managing that issue very well.

Mr Barnes said that overtime was a bad habit, as was leave. They had therefore passed a rule on it three weeks or a month ago, that anyone who had not taken their leave forfeited it.

On the Postbank matter, he was surprised they used the word “micro lending,” as he detested it. The credit available in South Africa for the previously unbanked had become a destroyer, not an enabler, and they would not participate in over-priced, non-technologically supported practices. Money could be advanced to people without assets, using technology and appropriate risk metrics, without charging them 30% for the loan. It was not only possible, it was happening throughout the world, so they would encourage lending which turned credit into an enabler. Money could not be lent to someone at a greater cost than any asset they could invest with. That economics 101 equation was obvious, and the break-even was between 5% and 8%. If one wanted to lend money to someone to grow a business, it had to be at about 5% or 8% in the current economic state -- it could not be above that.

Mr Dawood Dada, Company Secretary: SAPO, said that he had been able to source the statistics for the whistle-blower incidents for the financial year 2017/18. There had been 112 incidents, and they did have a service provider that provided that service, should the Committee require more information.

State Information Technology Agency (SITA): Annual Report

 

The Chairperson said SITA was an important player and the Committee was concerned about certain things that had happened. They were very disappointed that their CFO had jumped ship, because this entity had a huge responsibility and a very important service to render to the government and the people of the country. SITA had the Committee’s unqualified support, and it was hoping that the leadership would stick together and overcome the challenges. They were unhappy with SITA being called by other entities to deal with operational matters that were current, because not all of them were sensitive to the things that were happening at SITA. The Committee was committed to the work that was being done by the Board to clean the entity and getting rid of people who, for a lack of a better word, were sabotaging the progress of the country.

Mr Zukile Nomvete, Chairperson: SITA, said the Chairperson had touched on a nerve of how they could turn the organisation around. He had been at pains in his term of office to maintain some form of stability, because the organisation had been unstable. They needed an executive team that could at least finish a term, including non-executive directors. The continuous turnover created instability so people could come and do their own thing in the organisation. He had tried everything to retain the services of the CFO, but she had left. SITA had aslo lost a non-executive director, Dr Mhlathi, who had resigned in March. Another director had also resigned, so SITA had four vacancies at Board level. In the current financial year SITA had lost three directors, two of them non-executive and one executive. They had Mr Pretorius to act for six months until they found a capable replacement. 

Dr Setumo Mohapi, CEO: SITA, said the organisation was moving forward in spite the challenges. One of the unfortunate results of the different detours that they had to take in the year was their actual performance against the annual performance plan (APP). However, they accepted the results because behind them was a lot of work that would set the organisation up for a much better future. They had an opportunity now to create a new strategic plan that was based overall on the digital transformation of the public service.

He would like to emphasise not only the stability of leadership, but also its quality. He considered the current executive committee as one of the strongest the organisation had had in history. They were starting to attract the right people. When SITA interviewed a candidate, they did so together with the Board, so he was confident that the relationship between the executive management and the Board was very strong.

Two candidates had already joined, such as Mr Ntutule Tshenye, and part of his role was to create an environment where they could talk about strategic issues away from the coalface of operations. They had to talk about how to digitise public services. They were in complete support of SAPO in making sure that the cash payment system disappeared completely. Those conversations had to happen at a very high strategic level, not at the departmental and cluster level. Mr Tshenye last worked in the public sector in the 1990s, and had since worked for Philips, Samsung, and Microsoft. He had come to SITA for a cause, and that cause was to ride the ship with the government and country. The second appointee had been Mr Lance Williams, former Chief Information Officer (CIO) in the Western Cape. SITA had worked with him on the digital journey for the province. At the end of his term there, he had chosen to join SITA and use what he had learnt for the benefit of other provinces, and it was working.

Part of the clean-up that they had done was not only to attract talent. People who came to SITA were conscientised technologists, and social awareness had become the ethos and reason why people wanted to work for SITA. Most importantly, they were not attracting the wrong people -- those who typically came to SITA to sustain the old order of public value destruction. Those people would know that this SITA was not for them anymore. That was the context for the very disappointing results from AGSA, which had provided an unqualified audit on both finances and performance. SITA acknowledged the audit findings and were working through them.

Part of their transformation was the modernisation of everything. They had accepted that the documentation for public service processes was enabled by technology, and part of SITA’s modernisation involved being very clear about the processes that a government deals with at different levels. This included looking at the modernisation of the application environment of the government business solutions, the government enterprise resource planning activities and also the government productivity systems. They then would look at modernisation of the underlying infrastructure. SITA was quite happy that sometimes the SOEs did not have to go through SITA, but they had seen a number of them who had elected to go through SITA because the value proposition was much clearer to them.

When they talked about data in the cloud, that was the modernisation of their data environment. Their cloud, the new cloud system, owned and operated by government, would be live by the end of this financial year and indeed the Post Office would be one of the first customers. The last part involved more influence by SA Connect in terms of modernising the entire network of the country, working with provinces as well, because what had been found was that sometimes provinces had their own programmes which were not necessarily linked up, at a practical level, with the national project on SA Connect. This caused a lot of conflicts and as the Committee was aware, SITA had conflicts with the Eastern Cape, which they were resolving. They were also resolving what would have been a conflict situation with Limpopo on broadband. The North West, with the national government’s intervention, had re-invited SITA into the province to assist, and they had people deployed there. SITA’s entire programme was premised on modernisation towards digital transformation of government.

They had had quite a lofty expectation on customer satisfaction at 70%, but they were now at least above 50%. There had been a drop in the areas of accessibility, and engagement and inclusiveness in the report. They had decided certain things internally and could have engaged other stakeholders earlier in some of their initiatives. With the cloud initiative for instance, they had gone to the industry instead of starting with government IT officers. They started with the broader industry, and told everybody what they were going to do in April 2017. They had built the cloud systems, and it had been an innovation. He had seen an article where the global vice-president of IBM talks about them getting into cloud in a way that SITA had designed their cloud system. It was a government private cloud ecosystem made up of all the full capabilities that were in the country. Microsoft would not have set up their cloud system and invested R10 billion in a country if they had not been incorporated in that innovation. The complaint was that they needed to engage and talk earlier in their discussions. One of the reasons for the role that Mr Ntshenye had, was to close the gap.

Supply change management (SCM) had been an issue in their performance, as had the achievement of SLAs in the last five years. Spending on small, medium and micro enterprises (SMMEs) had been quite low against the target. They were enforcing the 30% target on SMMEs by their primary suppliers. Their internal system to do that had not been ready. For example, basic cabling work in government offices was something that could be done by SMMEs. He was personally involved in driving that project, which was also an educational programme. If one did not qualify, one was put on a development programme to make it easier to qualify.

The final remedy for SCM challenges had to be automation. There had been a lot of disruptions in respect of the supply chain, but they were quite resolute that they would fix it through automation. They had put in a gross margin target, and missed it. There had been an assumption that their labour tariffs that had stood the same for the last ten years, would be increased. They had not increased, so they had taken that out of their plans and would deal with it differently. With regard to succession planning, there had been a bit of resistance from the organisation, and they had had to enforce the rules on retirement. It was common cause that if one got to retirement age, there was no incentive to transfer skills. So in the third quarter of last year, they made a hard rule that if one was up for retirement, whether at 60 or 65 years, whatever policy applied, one would retire. This was because for two years the measure, or the particular target, was not been taken care of and there had been conflicts.

One of the things they had done in their business model was that they had created a new executive structure. They had moved human capital to an executive level, as prior to that they had been sitting at a lower level. They had seen a lot of progress in succession planning as a result of this.

With regard to financial performance it was also important that they measured themselves against prior years, particularly with their budgets because there were certain things beyond SITA’s control. Were they building an organisation that was moving forward or not? The balance sheet showed the net assets and the net value, which was a measure of the value of the organisation, had increased by almost R200 million. The cash and cash receivables were quite low and they were having National Treasury assist them with collection, but it was an issue. There had been marginal growth in the top line revenue, in spite of the challenges faced. They had managed their costs quite tightly, noting the risks that were there at the revenue level, and their surplus after tax was significantly above budget. This would create an improvement in the net cash for the next financial year.

SITA had not spent as much as they should have on capex, but they sometimes had to make decisions. The primary fiduciary duty of the Board and the job given to executive management was to ensure that the organisation was a going concern financially. When they found that they were going to have challenges on revenue which was out of their control, then they managed their costs. They also had to look to their investment programmes. This was what normal companies did -- during downturns, capex drops and they start investing funds when they know that an upturn is clear in the business cycle. Therefore they were protecting their cash base.

The issues raised with regard to the supply chain unfortunately had to do with consequence management at the executive level, and currently SITA did not have a supply chain executive.

Discussion

 

Mr Mackenzie said that when he looked at annual reports, he tried to get a feel of where the companies were going.  Certainly when looking at SITA’s report, he gets a warm feeling, as the trend line seems to be going in the right direction. For example, with customer satisfaction, the bulk of the arrows in the presentation were going in the right way. He commended the free cash flow, as nobody could underestimate having money in the bank. Was the dramatic decrease in irregular, fruitless and wasteful expenditure recorded in 2017/18, due to the improved controls at SITA? He asked for details of irregular expenditure detected in the current year but incurred in prior years.

Ms Shinn said that it was great to see the progress that SITA was making. With regard to the government cloud, they had set a target of one and had established 13 cloud services. How did they drastically underestimate what they would be doing with it? That was quite an overachievement. What had happened in the year that sparked the whole thing off? Could they provide the names of the partners involved in the cloud -- they had mentioned Microsoft, but what about some of the others that were involved? She knows the Chinese were “sniffing around” at some stage, but does not know if they were involved there.

SITA had spent R9.7 million on one legal dispute, and in their legal contingency they had R46 million pending or set aside. Could they let the Members know what cases those were?

The report referred to fruitless and wasteful expenditure in terms of the contract with Nationwide Security Services, which had been irregularly terminated at a R1 million cost to SITA.  How were they irregularly terminated?

For the year ending 2017, the Chairman was paid R746 000 in directors’ fees, but in the immediate past year he was paid R105 141, which was a considerable drop. Other directors had also been paid less in directors’ fees. Could they explain this? It was quite encouraging to see people in executive positions taking a bit of a knock at times of financial stringency in the rest of the country.

She said that the annual report was exceptional and congratulated SITA, because it gave them a sense of an organisation that had turned around a culture of impunity into a culture of performance. It really was a huge task, and she commended them for it. Ultimately their investment in employee satisfaction was critical, enabling them to attract the right talent and maximise the output of current employees so as to get them to the aligned goal. They were developing skills through their internship programme in an industry that attracts many people to the private sector, so they actually had to develop their own skilled people to enter the public sector and help drive government programmes.

Regarding the irregular expenditure, what was clear was that even in the past financial year, they had still dug up some more dirt, showed that an audit could show only so much and no more. Sometimes entities get a clean bill of health only to find out in later years that if one really dug deeper, more could be found. It was therefore important that they do not stop, even if the AG makes a comment on it in the audit report. Was any current action being taken against people who had defrauded SITA in the past?

Ms Tsotetsi referred to the implementation of the action plan, which included the assessment in 2016 and its outcome, and asked why they had included it in 2018. What had happened between then and now? When they spoke of short term and long term training, what was the actual duration of the training? There was a plan to secure a service provider by the end of October, and it was now mid-October -- was it going to happen as planned?

 

SITA’s response

 

Mr Nomvete referred to the directors’ fees question, and said the Board had been chastised by the Committee because directors were not paid on a retainer, but were paid per meeting attendance, so the more meetings there were, the bigger the directors’ fees. He had been encouraging management to perform timeously so that they did not have to meet on a regular basis. It had been very difficult because of the nature of the problems they had encountered, but they had tried to curtail the number of meetings, hence the variance from the previous years. It would perhaps have been better if they were on a retainer, because the fee would be flat and would give them something to incentivise for the meeting.

Mr Mohapi said that he was grateful for the words of encouragement and further guidance. Most of the irregular expenditure had been uncovered by them. The AG had added a very small portion of irregular expenditures that they had not covered. This indicated the extent to which the organisation was being managed from a rigour point of view, and it was a lesson learnt for everybody. They were doing risk-based audits and accepted that SCM represented one of the risks, so everybody including the internal auditors must spend more time there, in the high risk areas. What they were seeing was a spike through more detection. They were looking back at old contracts and if they found that they had been irregularly contracted, they listed them. If somebody responsible was still there, they were asked to account.

They had a system of disciplinary hearings, and the last time they had been with SCOPA they had been instructed to give a list of people and their case numbers at SAPS and the Directorate for Priority Crime Investigation (DPCI). Therefore that list was there, it was in the public domain. In certain cases he had signed an affidavit where he had reported two individuals from the private sector and laid charges against them. They were going to start a recovery process with the private sector. There was litigation occurring at the moment where SITA was asking for their money back for services not delivered, and they could prove that. It had to do that with SITA staff members as well, so when they came back before the Committee they would report on action taken to recover across the board.

The details of the irregular expenditures had been given in a full list in the report. Some were so old that there was no information on them, and the people involved had left. However, they did have documentation per case and with most of them, expenditure had happened after the contracts had expired.

It was mentioned in his statement, that SITA had parted ways with their old executive team. Most of their contracts had come to an end, the last one being in June or May, and from then on they had worked as a skeleton executive team, as they were building the team and putting in an interim structure. They started directly managing the people that were left, the heads of departments (HODs). The present executive team were able to manage their own HODs directly from quite a high level and were sharing responsibilities. In fact, they found that they had capabilities which previous records suggested that they did not have. They had put up a disaster recovery site in Welkom which under normal circumstances their team would say they did not know anything about, but they had got involved, found the problem and came up with a solution. They had underestimated themselves because of the history and had been pleasantly surprised that the capability had always been there, particularly in the cloud and E-government areas.

They called the cloud the “government private cloud ecosystem.” The very important thing about privacy was that even if the companies had public clouds, when hosting SITA they were given a private space. Microsoft, was one of the companies involved. VOX provided SITA with more of an enterprise cloud service, and they were out in the market for more enterprise cloud systems. They were building their own in their own business centre and were courting more cloud providers. To build their cloud system, they went into the open market and completed that process in 2017. The company that won was a local company that made use of technologies from both IBM and also Huawei. What they were going to do with all of this was to create an ecosystem so that they could deploy government workloads in the most appropriate place in terms of operations, cost etc. The ecosystem would be enabled by an intelligent supply chain because the cloud works fast, so the decision of where to place the workload must also be fast. It was open ended, as there was no limit on who could participate in the cloud system. Amazon and Google were eager to invest. Local businesses were also interested, mostly in enterprise cloud systems.

He had no details about how the security contract had been irregularly terminated. It was a very old case but they could find more information on it.

The concern about training was that supply chain training last year was non-existent after having paid for it. The staff had responded to that and they had a right to do so. The training was done now and they had appointed people and the right type of training as well. Internally, the E-Government team had developed a SITA university system to help assess the trainees and to determine the effectiveness of the training.

The legal bills were increasing because they were doing the clean-up, and they accepted that. They would see a drop in the cost of legal services.

Supply chain training had been done in 2006 and it was very disturbing that for all these years the skill sets were below average for the industry. The training had not happened because they had issues with their human capital management (HCM) unit. The HCM personnel were working with people in SCM to make money. For quite a long time there was no incentive for people to get the training done. He could confirm that their supply chain people were now in training. One of the disturbing things in the report was that, one of the weakest capabilities in SCM was in ethics. This was worrisome because the people had been there for ten years.

Mr André Pretorius, Acting CFO: SITA, said that the legal costs and contingent liabilities were mainly related to disputed performances by suppliers and claiming back the money, resulting in legal disputes.

Further discussion

Ms Killian said what was good was that their Committee stood as one when other committees wanted to question SITA’s abilities, and the issues involving Home Affairs and the Police Committee. That was why it was important to know all the shenanigans that had preceded the developments of the past two years. They understood that SITA had to restore their credibility and efficiency in the eyes of their customers, which were government departments. It was bad for the Committee to see that they had been drawn into the public eye and then had to go and explain. As far as SCOPA was concerned, it was true that constitutionally portfolio committees may call any entity to account, but there was a clear definition of the roles within their rules. SCOPA was supposed to look at the financials of audited statements, and were not supposed to engage in any current matters that reached the front pages of the newspapers. It was very important for the SITA leadership to understand that if they received such invitations, they should confer with the Chairperson. The Committee had already raised this matter, because they did not think it was in the interest of building trust with SITA. They wanted to make sure that there was no recurring theme of SCOPA doing work that was set aside for Portfolio Committees to engage with.

Ms Tsotetsi referred to the 7 000 government entities being connected, enabling access to the internet, transversals and other shared government services, and asked if the number included departments in rural areas. SITA had reported that power outages had affected its performance in August, and they had said the situation was being addressed. However, was the solution sustainable, and was there any mitigation to prevent it from occurring again?

Dr Mohapi responded that the 7 000 did include government offices in rural areas. On the power outages, they had instituted consequence management, and had changed systems, and protocols had been put in place. He personally received messages immediately when the Uninterrupted Power Supply (UPS) goes off the power grid. They were overhauling their entire incidents management process as well. They had been to different professional engineering communities to try and get professional electrical and mechanical consulting engineers to come and do an overhaul. They had tried it before, but this had been when people came and took money and did not do a full assessment. In the short term, they had contracted the Council for Scientific and Industrial Research (CSIR) and they were there doing the first scan of their electrical and mechanical plant. Consequence management had taken place, where it was quite clear that there had been negligence.

Broadband Infraco: Annual Report

The Chairperson said that the Committee was not going to invite them, until they discovered that they were regressing on their audit outcomes. When they performed well, they do not get invited, but when they do not, they attract their attention.

Mr Mandla Ngcobo Chairperson: Broadband Infraco (BBI), said that they would deal with what attracted the Committee’s attention. They were presenting the annual financial statements in circumstances where they were proud to say that they had had an unqualified audit with the findings that the AG had made. They would later inform them how they were dealing with them.

On the governance side, for some time they had had a board which had not been fully appointed. The shareholders did make three appointments, which had brought really great expertise on to the board. There still remained with two vacancies, but they were coping. At the AGM in August, the memorandum of understanding (MOU) had been finalised and signed by the shareholders. Funding had always been their nemesis -- they did not have cash. They were happy to say that they were already cooperating with Sentech on the basis of anticipated information of a new grant.

Mr Andrew Matseke, CEO, BBI, said they had achieved 19 of their targets. Four that they did not achieve were on the financial sustainability side, and tended to be historic because of their financial situation. An economic transformation target had been unique to the previous financial year, in that they had had expenditure at a multinational supplier for transmission equipment, and that had impacted on their spending by virtue of the multinational not being a BEE company. They also had expenditure on leases that had been renewed which had an impact on their key performance indicators (KPIs).

In terms of network performance and its financial impact, the rebates that they passed on to customers remained under 0.2% and within the target. The actual time to restore network falls was under the contracted SLA hours, and service availability was at 99.97%, compared to the 98.5% that they contracted on for most of their SLAs. They had not performed according to their target on women-owned entities. For Corporate Social Investment (CSI) they had had a cyber security installed and teachers and learners trained at a school in Limpopo. Their spending on training had been 1.45% of the payroll, where they had budgeted for 1%. They had continued the development of interns, particularly on the technical side, who had completed their practical training which would enable them to complete their qualifications,

Revenue had decreased by 5%, year on year but as had previously been reported when they were doing quarterly reports to the Committee, from the last quarter of the previous financial year, they had capacitated their sales team and the signing of new contracts was on the up. In the current financial year they were already sitting very close to R200million of new contracts that had been signed against a target of R235 million. The importance of mentioning that was that while one looked at revenue decline in the period that was being reported on, when one started signing up lots of new contracts it meant that they could expect a revenue surge going into the future. Due to revenue being down, their Earnings before Interest, Depreciation, Tax and Amortisation (EBITDA) was also down, but they had managed to generate net cash out of operations, which was what enabled them to be sustainable in the short to medium term.

Their debtors’ days were up at 57, compared to a target of 45 days, and that was specifically as a result of the irrefutable right of use (IRU) customers -- customers whose invoices were based on a deferred revenue. When they subtract those customers, the rest of their customers’ debtors days were within the target of 45 days.

Mr Ian van Niekerk, CFO: BBI, went through the financial information. He said their revenue was down, but they had implemented a sales strategy. It was important to know that their revenue signed for this year was already close to R270 million for the second quarter, which was quite significant, and although the revenue would be earned over a period of time, they would see the revenue was there. It was also important to note that their revenue for new national customers had increased by 26% even in the last financial year already, so it was the drop in the big customers, which was a contracted drop, that had been the reason they had regressed slightly on that revenue side. On their income statement, they had reached a stage where their cost containment was at a level where they could not cut any deeper. They were maintaining that cost level quite well and it was for those reasons that they were operating cash positively. Looking at their cash flow statement, they were generating cash for the first time, which was important from a liquidity point of view.

One thing on the income statement that he wanted to touch on was one of the findings that their auditors, not the AG, had raised, and that was they wanted BBI to discount their shareholders’ loans. It was quite controversial, because he had never seen any entity until this financial year. He thought it was the era that they were moving into, where there was a focus of auditors and all sorts of things to make sure that there was compliance in all aspects. BBI had substantial shareholders, and a discount would have quite a big impact on their financials, but they had complied, and as had been said, they had a qualified audit. They had discounted the shareholders’ loans, and as seen in the income statement, there had been a big interest income portion and then a big interest outflow item. Those were all accounting entries, and were not really interest earned or interest paid.

There had been 24 audit findings, of which 12 had already been resolved, some of them even before the audit was completed. Of the 12 findings that were left, six of those had been raised by the AG’s administration, which meant there might be a set of minutes that needed to be signed, and as the chairperson had said, they were one director short in terms of their MOI. That left six findings that they were still busy with.

The going concern finding would remain until they became profitable. There had been one specific finding that was related to the difference that they had in the calculation of the CEO’s bonus between how their management perceived the bonus to be paid, and how the auditors recalculated that amount. They did not agree with the amount recalculated by the auditors, and a result had disposed of that amount as an irregular expenditure in their financials. There had been extensive interactions with the AG and management on this matter. In the end it was one of two options -- if there was no concession, then they would have a qualified audit, but if there was a concession then there would be an unqualified audit but with the finding that there was a difference in calculation. The difference was in the method of calculation, not on whether or not she should receive her bonus.

Mr van Niekerk continued outlining the findings of the audit and BBI’s status in addressing them. He said that the next two findings relate to IT, and was really about user access. They were busy with changes in the IT system to comply. The findings had stated they must have six digits instead of five digits, so they were changing the way that they were doing things in the IT section.

They had had a finding relating to non-compliance with cost containment measures, which had been an oversight on their side, and the rest of the findings were administrative in nature.

Mr Matseke outlined BBI’s future outlook, which included the further implementation of other phases of SA Connect, the merger with Senthech into the National Broadband Network Company, implementing their turnaround strategy, focusing on sales and investment in infrastructure and the network, and to expand their network and internet protocol (IP) based services.

Discussion

Ms Tsotetsi said that the presentation did not have a very good story to tell. She asked what the initial target for training the SMMEs had been, and how many had needed to be trained. How realistic were their future plans and would they have the  capacity by then to make sure that the plans were implemented and ensure that everything was in place?

Ms Shinn said that to her, the main concern about BBI as a Parliamentarian was whether they were going to get taxpayer value out of the company. Was it going to become a financial drag, because they had been struggling since their existence, and there had been various reasons for that? Unless they were given the SA Connect business, they would be going under, and she was of the opinion that were they going to be a financial drag on Sentech. What value would they bring?

Their report indicated that they had very high risks, such as the likelihood of not continuing as a going concern. That was a high risk -- it was catastrophic. Why, if they had the SA Connect business, and were going to be coupled up with Sentech, was the risk that high?

Regarding the directors’ salaries and looking at the performance bonuses, there was a performance bonus of R3.5million. That was an accumulation of three years’ worth of bonus, which was more than R1million per year for performance bonuses for a company that was under threat as a going concern. What was the bonus for?

Was the director who was acting from 1 November now a permanent member of Board?

There had been a note on revenue that referred to a “refutable right of income.” What was that?

The Chairperson said that his colleagues had raised the issues that he wanted to raise. He had heard the CEO say that there was a bright light at the end of the tunnel, but they still had to overcome the hurdles. What was the magnitude of the hurdles that they had to overcome in order for them to reach the end of the tunnel?

There were issues of accountability at the first level of management at BBI. It was one of the things raised as a concern, although not quite highlighted. There were also issues of stagnation, especially at the level of management, internal audit etc. Their experience was that once they stayed at a particular level for two consecutive years, they were likely to be qualified for the third and fourth year. This was because things that were a risk were not being attended to. In responding to the going concern matter, as it was a recurring issue, could they provide the Members with timeframes, so that they would be able to oversee whether they were making progress?

Broadband Infraco’s response

Mr Matseke said that BBI had not had any capital investment for quite some time and had also been operating in an environment where it had an infrastructure licence. A direct competitor was Telkom, the likes of Dark Fibre Africa, and to a certain extent the three mobile network operators, customers and competitors. All of the mentioned entities had the ability to serve the market using both licences. A question had been asked whether a merger was not a convenient way of transferring the problems of BBI to Sentech. The answer was that there was significant potential in the market for BBI to be able to turn around and to offer competitive services much more than it was currently offering to the market.

There were two key requirements of moving in that direction. One was the ability to raise capital when pursuing a sales opportunity, and not to abandon it because there was no money to build the little bit of infrastructure required to service that customer. The other was the licensing issue, which they were going to address through collaboration with Sentech. Obviously, there were some internal management issues that needed to be addressed, but in the absence of those two they would carry on in this stagnation. The market was there -- they had a sales pipeline which was sitting with more than R600 million worth of opportunities that they were currently pursuing. They were getting there. It would take about two financial years for the turnaround to occur, even without SA Connect, to the point where they were net profitable.

Mr van Niekerk said the “irrefutable right of use” was when they sell, for instance, five year’s capacity on a link between Cape Town and Durban at 10MB per second, upfront for five years. They get the money upfront, and could use that money to provide the service without having to raise R100 million or R200 million to roll out the network.

Ms Tsotetsi asked whether directors were paid to attend board meetings. Was there a register to record proceedings? What happened in respect to matters arising from those minutes? Were they not discussed – just signed and approved

Ms Killian asked about network performance in neighbouring countries. If infrastructure was provided, did these countries pay upfront, or did BBI get its money afterwards? If so, she was concerned about Zimbabwe. How was thid managed, because it was obviously part of risk management?

The Chairperson said that that was so true, and a classic example was the Nigerian MTN fiasco.

Mr Matseke said that the Board meetings were recorded, so there was legal recourse in terms of the archiving those minutes. They had been able to go back and ensure that the minutes were signed retrospectively, and consequence management had been implemented against the person responsible. Disciplinary action had been taken by the CEO himself.

Currently, BBI connects all the neighbouring countries, and they were actually a very good source of revenue. The payments were a mixture of SA Rands and US dollars. There was potential for more growth. One of their current business cases for a link into Botswana had a pipeline of subsequent contracts to the value of R200 million, and there was a proposal on the table. The neighbouring countries at this stage did not present a challenge like Nigeria.

Mr Ngcobo said that the bonus paid to the departed CEO had been over a four year period. They ought to have paid her yearly in terms of her contract. Due to cash constraints she had not been paid so they had to make up for that before she left.

iKamva National Digital Skills Institute Bill

Ms Fatima Ebrahim, Parliamentary Legal Advisor, said that since their last meeting they had been tasked with going back and making further amendments to try and meet the Department on where they had differed on certain issues. They had also made a call to Members to provide any inputs and comments that they may have. They had received two submissions, from Ms Killian and Ms Shinn, and they had taken those into account as well when they did the redrafting process.

Drafting was an evolving process, the more changes they make the more changes they make, so they might see some things. DDG Shelembe just pointed out some new things after their long meeting yesterday, none of which were a train smash. By and large they had reached an agreement with the Department on the salient issues. The only thing that was left was to clean up the draft in terms of drafting conventions, because their focus had been on content.

The first and most important thing was that they had confirmed that the name was now iKamva Digital Skills Institute, and they had reached an agreement that it would not be a company, it would be an entity.

Ms Ebrahim went through the Bill, identifying the changes.

On the long title of the Bill, the only comment received was from Ms Shinn about not using the word “provide.” Technically, where they used the word “provide” in the Bill, it indicated what the Bill would provide for, not what the Institute would provide. It was not that they were ignoring the comment, they had considered it but no changes were made.

The Department had asked her to add “training” in relation to the collaborative laboratories, so where they state “digitals skills, knowledge production and coordination,” they would add “training” to that.

The Chairperson asked what the difference between knowledge production and training was.

Ms Ebrahim responded that the one would be the actual creation of content because they wanted to develop courses and materials for learning. The other would be the actual training to impart that knowledge.

Section 1: Definitions

Ms Ebrahim said they did some cleaning up of the definitions, as some were quite cumbersome. “Digitals skills” had now been defined to mean “the ability to use and develop information communication technology (ICT).” She was confident from a legal point of view that that definition encompassed everything that they were trying to do.

Ms Killian had said the definition of “Minister” should not be linked to a particular portfolio, bearing in mind that the portfolio might change, and she agreed. “Minister” now meant “the minister responsible for telecommunications,” and not for “telecommunications and postal services.”

The “Further Education and Training Act” was supposed to be the “Continuing Education and Training Act,” and they would make that change.

Section 3: Objects of the Institute

Ms Ebrahim said Ms Killian had requested that they be specific that the entity was a national public entity that was subject to the PFMA, and they had added that. They had kept section three substantially the same, but had tried to make the wording clearer because it was cumbersome.

Section 4: Functions of the Institute

They had tried to shorten this section, because it was long. They had taken out colloquial terms, such as replacing “the country” with “the Republic.” Yesterday they had tried to make it shorter where it was repetitive, and the DDG had said that they had a proposal on how to merge some parts without changing the policy or content at all. They would do that after the meeting.

Section 5: Establishment and functions of CoLabs

Members would recall that section 5 had been redrafted to include all the requirements a written agreement should have. Ms Killian had suggested that they add the duration of the agreement as well, which they had done. She had also suggested reference to the relevant post-school education and training institutions throughout the sections, but they had not done that because clause two states that one must enter into a written agreement with a relevant institution, and from there onwards they were speaking about a particular institution.

Ms Shinn had asked what was meant by “stakeholders” in subsection 3(a), Ms Ebrahim agreed with the Department that it would be difficult to list them, but if one read the Bill as a whole, it was clear that they referred to the government, the training sector, and the private sector. In subsection four, they had initially spoken about developing accredited short courses and the Department had come back to indicate that those courses were not necessarily short courses and they should not restrict themselves, so they had made that change.

Section 6: Establishment, composition and functions of the Board

Ms Ebrahim said that they changed the title to make it clear what the section was dealing with. Ms Killian had requested that they be specific that the role of the board was to provide strategic direction as provided in King IV, and they had done that in subsection two. They had also added in subsection three, that the Board was the accounting authority in terms of the PFMA. In subsection six, they had had discussions about the size of the Board and had agreed that the Board should be smaller. It was not necessary to have an inflated Board, so the Board could not be less than five and not more than eight non-executive members. They had added a new subsection there, subsection 9. Ms Killian had raised the issue of misconduct later on in the Bill, and how they would hold individual people accountable, so this was partly to cover that issue.

Section 7: Appointment of the Board

Ms Shinn had requested that the appointment of the Board be advertised in at least two national newspapers. The Department had argued that that had cost implications, but now they had agreed to it and it had been inserted accordingly. The rest of the section remained the same.

Section 9: Disqualification of a member of Board and removal from office

The issue that was raised in terms of section nine was whether they should prohibit civil servants from serving on the Board, and they had gone back to see how government dealt with civil servants sitting on boards generally. There was no prohibition in any other legislation that they could find. Generally, the de facto position appeared to be that civil servants were indeed allowed to be board members. She had been reliably informed by the Department that these civil servants were not paid and were not entitled to remuneration, so the concern about possible “double dipping” was taken away. They would also need the permission from the accounting officer to serve on that Board and it would be the relevant accounting officer in the relevant Department that should make sure that there was no issue. If the Committee felt differently, there was no reason in law why they could not include it in the Bill, but to be consistent with the other suite of Bills which the Department uses, they had not added it.

There was a question raised about what was meant by “office bearer, or employee of any party, movement or organisation of a party political nature”. They had not made a change there, but the proposal now was to limit it to political parties which were registered with the Independent Electoral Commission (IEC), so they would take out “movement” and “organisation,” and refer to “political parties,” because there was an issue raised about unions and so on. If the Committee was satisfied with that, then they proposed that they make that change. Ms Ebrahim asked the Chairperson if they could take comments about the matter of “civil servants.”

The Chairperson said that they could comment on the issue of “civil servants” and the last point on political parties. What was the issue with that?

Ms Ebrahim asked whether they should merely change it to state “office bearers or employees of registered political parties” that were registered with the IEC, were not eligible to be Board members. There was a concern that “movement or organisation of a political nature” was quite broad and could conceivably include a union or students’ representative council (SRC).

The Chairperson asked Members for their comments and justifications for their views.

Ms Kilian said that it made logical sense to talk about “registered political parties” -- it was a formal body that was registered to operate in the political sphere. She was trying to find the definition of “public servants” in the Constitution. Her understanding was that politicians were also not allowed to double dip, so they could not be appointed to any Board. In some cases, Members of Parliament (MPs) were prohibited. They could not earn a second income through the public purse. She wanted to see where in the Constitution that was, because it was important that they make that decision.

She had been one of those who had objected to the reference to politicians, and not to public servants. The reason was because if one looked at entities, even the entities that reported to them, one would see the CEO of one of the public companies sitting in the Board of the National Student Financial Aid Scheme (NSFAS), some of them were sitting on Sentech’s board. The point was that they must actually make sure that the person appointed as CEO was exercising full responsibility and not sitting on other Boards while being paid for their primary role. She had mentioned only one person now, but it was widespread. Initially, in the early 90s there had been the argument that there was a very small pool of adequately qualified people. They had moved on, and there were many excellent and very well qualified people. 

She would not go to war about the issue but she feels they should restrict it, and if they did not make it a complete prohibition they could perhaps say that no more than two members of the Board may be public servants, or something similar. The issue was that they must be full value for their primary responsibility wherever they served.

Ms Shinn said that she was totally opposed to a public servant sitting on the Board of a government entity, because public servants were very well paid. As far as she was concerned, they should be spending all their hours doing the work that they were paid to do, which was their primary job. One must make those spaces available for other people, and if public servants had special expertise relevant to that organisation then they could be called on to consult for free on a particular issue and then go away. It was unacceptable for them to have permanent tenure on the Board.

With regard to the political party matter, she was concerned about people with political motivations. Vigorous civic organisations had a right to talk, but her main concern was people with political agendas hijacking a Board. The Board was now small enough, and the skills requirements would help minimise any undue forceful interference. She was happy with the change in terms of that, but was not happy at all with the first point of civil servants being part of a board of a government entity.

The Chairperson said there seemed to be some consensus.

Mr Alf Wiltz, Chief Director: Department of Telecommunications and Postal Services (DTPS), said that since their meeting with Parliamentary Legal Advisor, they had investigated the matter further. They had found the matter was sufficiently dealt with, on the policy side, in the DPSA Handbook for Board Member appointments. The handbook sets out a framework of how to deal with matters of this nature. Specifically, paragraph 33 states that government officials were eligible to serve on such boards, but there was a whole chapter detailing how one goes about doing so. For example, it then says that, provided that the special requirements under paragraph 38 were adhered to, and that it did not amount to dual responsibility where one served both the board and in a state-owned company (SOC) oversight capacity within the department. Paragraph 38 sets out a whole range of factors to be considered, the circumstances that might be considered before something like that was approved. For example, it must improve the board performance; there was a historically disadvantaged individual (HDI) category, where it was done for purposes of advancing HDI; capitalising on experience; and the last one as an observer. Clearly one must go through all of that in order to pre-qualify.

Paragraph 46 refers to the remuneration and reimbursement of expenditure of public service officials, and provides that a public servant may not receive any remuneration for ex officio board activities pertaining to the preparation for board meetings, traveling time to and from board meetings and participation in board meetings, whether inside or outside of board meetings. Of course, one reads that with s30 of the Public Service Act, which says one could not get any other remuneration outside of government without the approval of the Executive, but that was just a side issue. The handbook that governs officials clearly makes the rules on these special circumstances, where the interest of government is served, that it may be permitted. Having said that, he agreed with the comment that it was within Parliament’s discretion to write anything. Perhaps there was also benefit in leaving the matter so that the consistency that exists in government as regulated under this policy remained there.

The Chairperson said that they needed to ask themselves what the problem was. What was it that they were avoiding by not including councillors, and Members of the National Assembly and the NCOP? What was it that they were avoiding by not wanting to include a political player? If they answered that question, then they would find a reason to adequately address the issue of public servants. Did the argument raised about skills assume that the person who was a politician did not have the necessary skills? Perhaps that could be somewhat true. Would it be fair to bar municipal councillors, who might have outstanding qualities, yet a powerful DG, CEO or DDG could be appointed? He agreed with his colleagues, that they needed to answer the question of exclusion. If politicians were excluded because they were politicians, and possibly had the muscle to sway things politically towards a particular direction politically, surely a public servant was better qualified to do this because of the strength and capital that they carry. Office bearers and employees of a party were actually public servants in a political party. They may not necessarily be politicians, but were just employees such as researchers.

Ms Tsotetsi said that she was in agreement with regard to the office bearer matter, because that person holds too much power in the organisation. However, it was also difficult to find a person who was not somehow associated with any political party. There were rules and regulations to follow in the manner in which a board operates its business,. The person appointed needed to just operate in a manner dictated by the board. What was important was for the person to do with what was required of him/her.

Ms Shinn said that she wanted clarity on what Mr Wiltz had said about the prohibition of remuneration. He had referred to an ex-officio position, but what about an executive board position?

Ms Ebrahim suggested that in terms of s9(i), it stated that “a person may not be appointed to a board if they were a full time public representative of a political party.” That meant that they would have to be a member of either a national or provincial parliament. A part-time councillor could do what they liked in the afternoons.

The Chairperson said that they had dealt with that one already.

Ms Shinn said that she was talking about (i).

The Chairperson said that that (i) was a standard that applied earlier, and they were now referring to (d).

Ms Shinn said they should then scrap (i).

Mr Mackenzie said that with regard to that clause, he could give them a practical example. He had a member of his local DA branch who worked for one of the large gaming organisations. She had been elected chairperson of the Board and she could not accept it, because the Gaming Act says that any officer bearer in a political party could not do what she did in her work environment. Therefore she could not accept it for that reason, and when they talked about an office bearer they were referring to that. His concern was that they did not encroach on people’s freedom of association. They needed to be careful with the clause. He supported Ms Shinn’s proposal that the clause should be taken out.

Ms Shinn said that people wanted to know what the mischief was about the public servants. The mischief was that a full time public servant was not spending time on his public servant job.

Ms Kilian responded that she wanted to know what the mischief with the politicians was.

The Chairperson agreed and said that the question referred to the prohibition on a political player versus a civil servant.

Ms Kilian said that she thought they were closer to a solution, and going through the Bill was interesting because they were chopping and changing as they went. They had not even been through it clause by clause and they had not even adopted the motion of desirability. However, it was acceptable because they were working on principles.

They were closer to realising what they wanted to achieve. The point was if they removed (i), she would be happy, because if they said because one belonged to a party and was serving in the party one could no longer serve on a board, they would infringe upon one of the fundamental rights in the Constitution. She was prepared to retain (d), as it was a good principle, but she was still not happy to just let go of public servants, as she shared Ms Shinn’s concern. They could say that public servants could be allowed to be appointed on a board provided that they worked the hours that they spend on board meetings, without any additional remuneration. She did not think it was a bad principle to say they must stick to their jobs -- her argument was there was no longer a shortage of skilled and qualified people.

The Chairperson said that they should flag the matter and Members should think deeply about it and extensively consult with their political principals and political parties. The civil servants, who were the interested parties in this regard, should speak among themselves and convince the politicians about their participation. It remains flagged.

Ms Ebrahim said Ms Shinn had raised a flag about the term “misconduct,” and the removal of a board member for misconduct in terms of subsection 3. They had covered that to a certain extent and in terms of the Labour Relations Act (LRA), misconduct would be where one breached a policy or a known standard, and that differed from institution to institution. She was feeling comfortable as it stood, as there was enough case law to guide them and they were not going to find themselves in a situation where it was a grey area.

Section 10: Vacancies

They had said that the Minister must fill any vacancies in six months. They had also added that in the period prior to a vacancy being filled, the Minister may appoint a suitable person from people who had been previously shortlisted by the nomination committee or in any other transparent manner on a temporary basis. This was because there was quite a small board, so if they were in an unfortunate position when one member resigns or one passes on, that may render the board dysfunctional. To cater for that situation they had given the Minister discretion there.

Section 11: Conflict of interest

The conflict of interest section was new. Members would recall that at the last meeting they had spoken extensively about the issue of a code of ethics and conflicts of interest and whether they should repeat what was in the PFMA, and how they were going to package all of this. What they had done was to have two clauses, and section 11 deals with conflict of interest. What they were saying there was that a member, upon appointment and annually thereafter, had to disclose that a member of their family, a business partner, spouse or associate had an interest in any matter which may preclude him or her from performing their functions as a member of the board in a fair, unbiased and proper manner. They had taken out “financial interest,” because it could be any interest, it could be a political interest rather than financial.

There was a concern if a board member made an annual disclosure, what happened if months later that member suddenly became a director of a company or acquired some shares, and now conflict arises but the disclosure was due only a few months thereafter. What they had done was to say that at every board meeting they must disclose, based on what the particular agenda of the meeting was. There would be something that would be circulated and it would need to be minuted, and all the board members could then continue on the basis that they did not have a conflict. They had gone further, and said that they could not vote, attend or in any other manner participate in any meeting of the board. Ms Shinn had asked that they be specific about recusal, and the reason they had not even gone to recusal was because at the very outset one was not allowed to go on. If recusal was added, they were putting the right into the hands of the board member, whereas the way it was currently drafted, the member could be kicked out.

They had also added that where somebody suspects somebody has an interest but had not declared their interest at the commencement of the meeting, for the board to act on its own accord and make its own decision. It was just an added measure of protection. The main thing was that if there was non-compliance with this, it was a criminal offence. It was very serious, because the interest clause was drafted widely which meant that the safest thing to do if one was a board member of this entity, was to disclose everything. The board could decide whether it was or was not a conflict. It was a little bit harsh.

Section 12: Code of ethics

On the code of ethics they had added something new, because they had had discussions around how much detail they could put in. The problem with having ethical standards in the Act was that if they left something out and then later on it arose, one would have a member saying that they had not breached anything because it was not listed. They had been very cautious about that. What they had said now was, let the board in consultation with the Minister, adopt a code of ethics and then make that publicly available. They had said what that code of ethics must contain, so it must have all the fiduciary duties of the members of the board, including the duty of that member at all times to diligently perform their function of office and exercise utmost integrity, dignity and care in the performance of their function. That alone was enough to peg any ill behaviour -- a good lawyer would be able to box any unethical conduct in there. They had also included that there must be information on the procedure for the annual and ad hoc declarations of interest to the Minister, as well as the government principles in terms of which the board would carry out its powers and functions. These things changed as they learnt more, as the economy changed and so on. The document would be a fluid document. It must be adopted by the first board but then reviewed at least every five years. In terms of oversight, if the Committee felt there were issues, they could always call the entity to account and tell them what to add or remove in their code to cater for any possible new scenarios.

The Chairperson said that they should pause and asked the Members for reflection. He said that the figure should send a strong message that they were becoming intolerant of people who turned a blind eye, deliberately forgetting that they had an interest. A penalty of R500 000 would not be a bad idea, because the bigger the figure the more conscious people would be, and would ask themselves whether they wanted to participate and would make them question their honesty. 

He asked why they had clauses, such as clause five, specifying a sentence for a period not exceeding five years. It meant it could be one day. Why did they have clauses that were written that way? It appeared to be a very beautiful loophole.

Ms Kilian said that she shared the eagerness to introduce sentences, but could transgressions of the Board, or of members of the board not be punishable in terms of the PFMA? If there was gross irregularity they could be locked away.

Ms Ebrahim responded that that was correct, but to the best of her knowledge there had never been a person in South Africa who had gone to jail for a PFMA contravention.

Ms Kilian said that that was exactly where her gripe was. There must be action, and the laws needed to be enforced. They could put it in the law now, but if there was no implementation then they would be sitting with the same situation.

The Chairperson said that the problem was that the PFMA was always looked upon as an internal regulatory regime rather than anything else. Had anyone ever been taken to court in terms of the PFMA?

Ms Shinn said that it was an Act, not an internal administrative policy.

The Chairperson asked, who must make the decision?

Ms Kilian said it must be the individual responsible -- the head, the department or the Minister.

The Chairperson asked if a Department could send a person to jail for five years.

Ms Shinn and Ms Kilian both said yes.

The Chairperson said that that would never happen, and this Act was actually better.

Mr Mackenzie said that one had to allow for judicial discretion for the most part when it came to applying the sentence. There could be mitigating factors that had led to the situation, and if they applied a minimum sentence they had to give that sentence regardless of the mitigating factors. They could never know what the factors were until the case arose, but they had to allow for that flexibility, that leeway, for an objective magistrate to make that call. If they wanted to send a message, they could make it R500 000 and a ten year sentence.

The Chairperson commented that it might say ten years, but he knew that it was going to be one day. He was fine with R500 000 and five years.

Mr Mackenzie said that with five years, they come out after a year.

The Chairperson said that that was good, it was better than a day.

Ms Ebrahim said that there was also a separation of powers, so they could not be telling the judiciary exactly what they had to do, because then there was no role for them.

The Chairperson said that that was just a statement. Look at how much the judiciary puts pressure on them to pass laws in a certain way and give them timelines. Did one call that a separation of power?

Ms Ebrahim said she agreed that there was judicial overreach, but that was a response to the climate. It would have been different in a different climate, because at the end of the day judges were people.

Section 13: Board Committees

Ms Ebrahim said that nothing there had changed, but DDG Shelembe had just informed her that the Minister did not necessarily want to be involved in the appointment of these board committees, and said it was an internal matter for the boards. She fully agreed with that, so in 13(1) they were proposing to take out the words “in consultation with the Minister.”

Ms Tsotetsi said that in terms of s13(1), in conjunction with the one stating that the Minister would participate in the dismissal of a board member, then they say the Minister would not participate in the appointment. How did that work?

The Chairperson said that were in fact sub-committees.

Ms Ebrahim said that the board would have sub-committees, such as the audit sub-committee etc.

Professor Walter Claassen, Board Chairperson: National Electronic Media Institute of SA (NEMISA), said that on 13(1), he agreed that “in consultation with Minister” should be removed in general regarding committees, but believed that there had been an arrangement that for the Audit and Risk Committee (ARC) that still had to be approved by the Minister in most cases.

The Chairperson countered that there was no sub-committee that had the final say, according to this. Those sub-committees did not have decision-making powers unless expressly stated -- if the board gives them the power to make decisions. In normal circumstances, they made recommendations.

Prof Claassen said that he was very certain about ththeat arrangement that was applicable to them because in general, the ARC had a different position from just being a committee of a board. It had a completely different responsibility and an individual responsibility, separate to the individual responsibilities of board members. As far as he was concerned, the ARC chairperson at least had to be submitted to the Minister, and it was not just at discretion of the Board.

The Chairperson said he accepted this.

Mr Mackenzie said that there was no harm if they left it in there. Could they change the use of the word “may” to “must,” because every board had a committee and certainly this board would have a risk committee, for example? Therefore, it must appoint a committee. There was no discretion there.

Ms Kilian said that there were two ways that she thought they could deal with it. They could say the Board “after consultation,” so it was not in consultation with the Minister, or they could remove it. They must remember that they were now creating an entity and just wanted to make sure to what extent the PFMA prescribes the details of “must have” board committees? Obviously it was a small board so they would have to decide which committees they would want, because some functions could be combined. What were the critical functions that should be contained in board committees? They could then differentiate to say in the case of ARC it must be done in consultation with the Minister, but in respect of the other committees they could say at least the following committees must be appointed, and then other committees may be appointed if  the board  so considers. They would have to make sure that in terms of financial reporting they had the necessary committees in place, but the others would be “nice to have.”

The Chairperson said that the crafters would help them out. What he knew was that for the listed companies on the stock exchange, they normally prescribed that the chairperson of an audit committee must be an accountant with years of experience. He did not know why a public entity would want the Minister to participate in the appointment of those members. What was important would be the qualities of the members or the qualities of the chairperson of the audit committee.

Mr Omega Shelembe, Director General: DTPS, said that if they were still making a case for the removal of the Minister in this determination, and they would still like to do so. The fact of the matter was, although it sounded like a simple thing that could be processed quickly through the Minister, in practice it did not work like that. Once one wanted the Minister to put his stamp of approval, it was his responsibility to make sure that they went through that person’s qualifications, conduct etc. -- all kinds of things that he thinks were pertinent for the approval of the Minister. The fear was that one did not want boards shifting responsibilities, saying that they had informed the Minister or that that was approved by the Minister. The board needed to take its own accountability for some of the decisions, and they felt that if they wanted the Minister to be involved then they were constricting the flexibility of the board.

In terms of specifying the skills set for the audit committee, the Treasury regulations do in fact specify the kinds of skills that one require in an audit committee. It falls short of saying somebody must be a chartered accountant (CA), but if one were to summarise, one must be financially literate. Those requirements were there. In terms of the draft Treasury regulations, they had been in draft form for a while now, since 2013 or 2014. The new draft regulations were indicating that perhaps the Minister may need to play a role in appointing members of the audit committee, but this was still not there in the current regulations.

Ms Ebrahim said that in terms of the PFMA, there must be an audit and risk committee, and regulation 27 sets that out in quite a bit of detail. Therefore the “may” could never be interpreted to mean that one had a discretion in relation to that committee, because one was subject to the PFMA. That gave broader power should they wish to have other sub-committees. They would recall that in the clause prior to this, in the code of ethics, they had said that one of the things that should be included was the governance principles in terms of which the board would carry out its powers and functions, and there was no reason why that could not go into some detail as to the particular committees they should have at a particular stage. This was because even in terms of King IV, these committees change, and in a few years’ time they may feel the particular need for a committee that they may not have envisaged now, so she did not suggest listing it because the most important one was covered by the PFMA.

Section 14: Meetings of boards

 

Ms Ebrahim said that the main issue where Members had raised a concern was with sub-section six. A quorum was two-thirds and there was a feeling that this was too high and might hinder the board from doing its work because they may not be able to secure the quorum. The Department felt strongly that notwithstanding it was high, it was necessary, and she would allow them to take the Members through their reasoning for that. She wanted to draw the Members’ attention to sub-section seven -- they were moving with the times and did not need all board members sitting around the table. They could do some sort of “round robin” or Whatsapp group. That was the way they had tried to deal with it. It was not like the old days where if a member was not there physically, the meeting could not happen. She would let the Department convince the Members why that quorum was necessary.

 

Mr Shelembe said that they had moved from the premise stating that that all board members must attend all board meetings, and then they could allow for exceptions. They were trying to for allow a situation where 40% of the members were not at a meeting yet would claim they were bound by decisions they did not agree with. That created mischief. If they said the quorum for whether they proceeded with the meeting or not was 50+1%, and say they did reach a quorum, in essence the decision was taken by that 50+1%, which meant that in a board of ten people, they may have a decision being made by three people. In any event, if they were trying to organise a meeting and 40% signalled that they could not attend, it was good enough to consider another date.

The Chairperson said that he got their point.

Ms Shinn said that she agreed with the Department.

The Chairperson said that there seemed to be some level of buy-in from the Members.

He said that the directors were employed, and were not fully employed by the entity. They were rendering a service, some of whom had to be elsewhere, so they were saying that they could attend through use of the cell phone. “Round robins” were where people were recorded to be attending electronically. The secretary reported the number of them on the line, and took the minutes. Once they took a decision, the secretary had to write it out and send it to all the members, and all of them must sign. The data would then be collected, noting that all of them had agreed to the decision which they came to during their electronic meeting. Then when the board meets, they finalise that data as a board decision.

Mr Shelembe said that his understanding of this process actually excluded what the Chairperson had just said, as a tele-conference, for all intents and purposes, was considered as good as a meeting. Round robins, however, were where people did not even get to hear the benefit of one’s thinking -- they considered the resolution and then either sign and approved, or did not approve, individually.

The Chairperson asked who then takes the decision. Was it one person who then gets a buy- in from other members? However, he conceded that they should not get caught up in the details. The principle was that they were now saying that a meeting could occur if two-thirds of the members were available over the phone, for instance. He asked if they were fine with the clause. No one objected.

Section 15: Dissolution of the board

Ms Ebrahim said that there was a concern raised by Ms Shinn over whether members who were in a board that had been dissolved, could be reappointed. What they had done now was to say that they certainly could be reappointed, after the Minister had followed the process of the Promotion of Administrative Justice Act (PAJA). This was when he gave each member of the board the opportunity to give him reasons why the board should not be dissolved. Of course, members could state that they did not want the board to be dissolved because they had personally done everything that they were supposed to do, and that they were one of the non-errant members. They could then be appointed again, notwithstanding that they were part of a board that had been dissolved. That was what subsection (5) sought to do, and that addressed Ms Shinn’s concern.

With sub-section 15(6), there was a request that the Minister report the dissolution of the board to the National Assembly. They had originally said that this must be done within 30 days, but yesterday they had agreed to extend that period to 60 days to ensure that the Minister had enough time to collate the report and submit it to the NA. They were open to the Committee asking them to reduce it again. Ms Shinn had asked whether or not they should give more detail as to what went into that report, but for now they merely stated that it must set out the reasons for the dissolution. The difficulty with that was where to draw the line on what should be included, and how to phrase it. Legally the way the Act was drafted, it states that they had to have a new board -- they could not be without a board -- therefore was it merely going to be a repeat of what was already their legal obligation? Her own feeling on the matter was that when the report came before the NA, the normal course of business would dictate that the report be transmitted to the relevant committee, which was this Committee. She would then expect, as part of the Committee’s oversight processes, they would call the Minister to give more details. She thought that that should be sufficient, as opposed to saying the Minster must include all of that detailed information.

The legal advisor to the Department also raised the issue that board members who were going to challenge this were obviously going to be focused on the reasons for the dissolution in the report, so on one hand they did not want to put unnecessary information there and on the other hand, one would also want to give them a long enough time period to ensure that the reports were adequately captured.

The Committee could give them guidance on whether they were happy with the 60 days, or if they were satisfied that the report for now sets out that only the reasons should be included.

Ms Tsotetsi said that before the board was dissolved, there should have been discussions and processes, so that by the time Minister takes the decision to dissolve, there was already available information why it was dissolved. It was just to write a report to the NA, so maybe 30 days was sufficient.

The Chairperson said that he had an unrelated matter, with s15 (5) -- the processes -- were they referring to the correct clause?

Ms Ebrahim said yes, when they wanted to dissolve the board, the Minister’s action to dissolve the board would be an administrative decision. In terms of the Constitution, administrative action must be fair and PAJA lays out the process, and a fundamental a part of that process was that the other side must be given an opportunity to say why the board should not be dissolved.

The Chairperson said that his understanding of the clause was the appointment, and not the dissolution. The process of dissolution happened where PAJA operated. The Minister, after following the contemplated process in s15 (2), was how he thought the clause read. A related issue spoke to the mismanagement, in the clause referred to in clause 6, and nowhere did it speak about management. Did strategic direction in s6 (2) equate to management, because if a person was being fired as a result of mismanagement, did it read properly? There was a gap between the mandate of the board and the reason for firing.

Ms Kilian said that how she read it, it was actually mismanagement of the entity, because the board was the accounting authority. If the entity was being mismanaged, the board must account for it and the Minister could say in terms of this law, the board was unable to perform its duties according to the Act, or on the grounds of mismanagement of the entity. The board was responsible for ensuring that the executive management did what they were supposed to be doing in terms of the PFMA. The accounting authority, the board, must be held accountable if there was mismanagement of the entity.

The Chairperson said that they must think it through, and the lawyers could immediately react if they wanted to.

Ms Ebrahim said that she could see where the confusion was, and perhaps the term “mismanagement” must be replaced with something along the lines of “the board failing to carry out its responsibility in terms of this Act or any other law.” They could look at that.

The reason it was linked to the PAJA process, and not the new appointment process, was of course that one did not want a situation where the Minister dissolved a board and then went back and appointed those errant characters again. The only people that could be re-appointed were the ones that could prove not to have contributed to the failure of the board and in any given board, even in a dysfunctional board, there may have been that one or two people who kept on objecting to the decisions of the board. There was no reason why they should not be allowed to be reappointed.

In terms of the 60 days, was the feeling to make it 30 days?

The Committee agreed that 60 days was fine.

Ms Shinn said that they must not wait until day 59 to submit, though.

Section 16: Appointment and conditions of service of CEO and CFO

Ms Ebrahim said that the major change here was that they had initially said that the term of office of the CEO and CFO would be limited to ten years. There would be the first five year term, and then one additional term. The Department had given very strong reasons why they should not limit it. It was not a political appointment -- it was actually just an ordinary employee put in these positions and if they were working well, there was no reason for them not to continue to perform in the position of CEO or CFO. What they had now said was that they must have five year terms which were renewable.

Ms Shinn said, renewable and reviewable.

Ms Ebrahim agreed that they were reviewable too, because there was a performance agreement as well.

With s16(6), the practical problem that the Department faced when liaising with the Finance Minister was that they were creating a dependency on the Minister, because to say “in consultation”  meant that the Minister needed to approve the salaries and so on. To make things easier, they had said that there must be a remuneration framework between the Minister of Finance and the Department as to how they were going to pay the CEO and the CFO. They could agree to the timeframe there and the salary bands, because even within a CEO and CFO level, there may be justification to pay one CEO higher than another CEO, depending on the person’s experience etc. They had built that in, and those two Ministers would agree to a remuneration framework.

Section 17: Functions of the CEO

Ms Ebrahim said that there they had just listed what the CEO must do. It was not new, so there were no changes there.

Section 18: Termination of employment of CEO and CFO

Ms Ebrahim said that what was new there was that they had said in s18 (2) that the board, when suspending the services of a CEO or CFO, must do so in consultation with the Minister. There were strong arguments for and against that, as to whether the Minister should be involved in the suspension of these officials or not. They had put in that in consultation with the Minister, the board could apply its mind to allow the Minister to have a role in it or not. Whether it did or did not, it remained lawful. It was a policy issue for the Members to consider.

Ms Kilian said that the board may suspend, but if it did so it must do so in consultation. It was an important clause, not in case some of the boards just go rogue. It was important to retain it because their experience with boards was that they just became involved in management issues, in an indirect way that one could not really catch them. Then they clashed with the CEO who had to account, and they override and the CEO refuses to implement, and then the board suspends the CEO. She said that she would be comfortable with “in consultation with the Minister.”

Ms Tsotetsi said that given the recent happenings, she also agreed that the Minister should be involved, but the board should discuss among themselves and inform the Minister of their decision, and convince the Minister that this was the right decision to make.

Prof Claassen asked whether the point would be discussed again at some point. This was because one had to think about the options of the board. What options would the board have if the Minister disagreed with the recommendations? There might be exceptional circumstances, but they just wanted to look at that again.

The Chairperson said that it would be deliberated on again. They were just making sure that they thought it through and then they would come back with the final dictate.

Section 19: Acting CEO and CFO

Ms Ebrahim said that this clause dealt with the appointment of an acting CEO or CFO, where the holders of both offices were unavailable to perform their duties or had been suspended from office, removed or had vacated office. It could be that all the senior staff were involved in what had led to the removal of the CEO or CFO, in which case the board, in consultation with the Minister may appoint any suitable candidate.

Section 20: Staff of Institute

Ms Ebrahim said that this clause dealt with the appointment of staff, and of course that was an administrative role that the CEO played. In s20 (2), they deal with the remuneration framework that they had earlier referred to, as to how a person in that position would be remunerated. They had also said that the CEO must supply each employee with the copy of a code of conduct, as approved by the board for purposes of disciplinary procedures and also as a means of measuring performance and where there was misconduct.

Section 21: Funding of Institute

There were no changes there -- it was still money appropriated by Parliament, and revenue derived from its investments, donations and contributions.

Section 22: Regulations and policy

Ms Ebrahim said that they had added “policy” there. The reason for this was to say that the Minister may make policy on any subject matter related to this particular Act which was consistent with the objects of the Act, and then issue directives to the board. The simple example that they had been using in discussions among themselves was that the Minister may issue a policy to say that the first co-labs that were going to be set up were going to be in the main metros. This did not deviate from the purpose and objectives of the Act, but it would be in line with where the Department was going in terms of its policies.

There was a proposal raised that regulations should come to the present Committee for approval. She had not included it. One could certainly find it in other legislation. Her personal view was that regulations were subordinate pieces of legislation. The whole reason that the Minister was allowed to make regulations was so that the legislature was not burdened by them. The feeling was that regulations were really practical mechanics of how things were done, and the Minister would be best placed. In terms of oversight, of course the Committee could call the Minster to account for the regulations, or why there were no regulations relating to a particular subject matter. It would unnecessarily burden the Committee with having to approve them when they were not technical experts in that area. She had not included it, but they certainly could and it did appear in other legislation.

Section 23: Transactional arrangements

Ms Ebrahim said that the section dealt with the widening up and dissolution of entities that were being merged -- NEMISA, the e-Skills Institute (e-SI) and the Institute for Space and Software Applications (ISSA) -- and what would happen to members of staff and other practical issues. If Members wanted details on the processes that were being followed and the amount of staff in those entities and how things were going to be done, the Department could certainly provide them with that information.

Section 24: Short title and commencement

Ms Ebrahim said that this section was very basic. The Act was called the iKamva Digital Skills Institute Act. She said that that was all from their side.

The Chairperson called for contributions.

Discussion

Ms Killian said that on regulations, she absolutely concurred. Regulations always contained all sorts of technical detail. They must make sure that they had the Framework Act which puts in place the necessary belts and braces to create an entity that would be held accountable, and for the Minister to be held accountable. However, the detail on when it must be published and all of that in terms of regulations, that was secondary legislation and did not need to come to the Committee.

Prof Claassen said that he would be untrue to his profession as a former academic if he did not ask that they look at the definitions again. He referred to the definition of “digital skills” on page five.

The Chairperson said that he first wanted them to deal with the last part. As oversight, they could not just let it go. There was an issue about the transfer of staff from these entities into the new one. The board had appointed one of their own as a CEO. He asked Prof Claassen if he was correct.

Prof Claassen said that he was indeed correct.

The Chairperson said that this person was the acting CEO. He assumed that they had appointed the person, using the Companies Act that was the one that was a bit flexible, as it did not really prescribe the procedures for appointing these people. At the period at which s23 kicks in, the person who had been appointed in terms of the Companies Act could then automatically be secure in a position under the law. Was that a good understanding?

Ms Kilian said that in her understanding, NEMISA was not a creature of law, so the appointment therefore was in terms of which Act? If it was through the Companies Act, surely the Act would restrict the seamless transition from board to CEO? The concern was that that they could certainly not endorse any mischievous or irregular move of a board member into the position of CEO. In the process of creating a new entity, the transitional arrangement must regularise the move. They certainly had to investigate that. They had to know exactly what they were saying, otherwise they would have to make specific arrangements in the Act not allow that.

Mr Shelembe said that he was not sure if he was following the Chairperson’s concern over the transitional arrangement as it stood. The clause said that whoever the CEO of NEMISA is, became the CEO of the Institute until the end of their term. However, the Chairperson was then referring to the situation where they had a board member performing the function of an acting CEO. If this law were to come into being and the person was still performing the duties of acting CEO, that meant that the person would continue to act. That was what it meant, but in terms of the processes, the board was in the process of recruiting a CEO for the entity.

Whether the board member could have acted or not acted, in terms of the Memorandum of Incorporation (MOI) of NEMISA -- and which was provided for in the Bill -- it was people from inside that were to act as CEO, and they looked to the next senior person. However, the board had approached the Minister at the time to let him know that there were no such people inside, and had asked for someone from the Department to come and assist. In the interim, they would get someone from the board to act. That was how it had happened.

The Chairperson said that did not answer the question, and he wanted an answer. He was saying the board had appointed one of their own, and the legal instrument that allowed such an activity was the Companies Act, because one could be chairman of the board as well as the CEO at the same time. That was why he was saying that he assumed the Companies Act was used to appoint someone of their own, to relinquish the duties as a board member and act as a CEO. The process that he was talking about happens, and it was fine. What would happen if they passed the Act today, tomorrow or next week?

Ms Ebrahim said that she was completely unaware of the background, but she understood that the Committee would not be happy with the current acting CEO of NEMISA becoming the acting CEO of the new Institute for the remainder of that acting period.

The Chairperson said that that was not the issue. They had nothing against the CEO as a person -- they had an issue with the principle. They had dealt with two beautiful examples. There was the SABC board, where the board members had appointed individuals from the street. Hlaudi Motsoeneng had been appointed from nowhere to become the chief operating officer (COO) and had even gone further and sat in board meetings. There was also the recent example of the Universal Service and Access Agency of South Africa (USAASA) where the company secretary was appointed in a public entity. A request had been made to the Minister for an increase in the salary, and when the Minister had not agreed, they had invoked the Companies Act to permanently appoint the company secretary in a public entity and to regularise the salaries. He said that they needed to look at those issues, so that they were not seen to be faltering. They needed to ensure that whatever they did was within the law.

Mr Mackenzie asked if Mr Shelembe had said that the board was currently engaged with the appointment of the CEO. He thought that this current board could not appoint a CEO for an entity that was yet to be established. It would be highly irregular if something like that was happening, but he was open to correction.

He said that he would imagine that the CEO of the new entity, which incorporated all these different entities, would be different to the CEO of NEMISA, and again he stands corrected. He was very uncomfortable with the clause that basically guaranteed employment for someone moving from one position to a newly created company and he did not understand why that was even in there. Why could the process of recruiting a CEO not happen outside a clause in the Act? He would appreciate clarity on the board’s activities at the moment.

Mr Shelembe said that he was going to request assistance from the legal people present, in so far as the application of the Labour Relations Act (LRA) in a transition of this nature. In the process of recruiting a CEO, it was indeed a fact that NEMISA currently did not have a CEO, because the CEO had resigned. They may indeed take counsel from the Committee if the Committee felt that perhaps they may not fill this position on a permanent basis or on a contractual basis, as was ordinarily the case, until the new entity came into being, and then they appointed a CEO in terms of that law. It was something that the Minister may genuinely consider. He said that his understanding in terms of transitional arrangements was that if the current CEO, CFO and other members of NEMISA staff were all in place, their security of tenure or security of employment would have been protected according to the LRA, and through this legislation his understanding was that they were not changing those terms and conditions of their employment. This was why they were allowing for their transition into the new entity. People who perhaps knew the LRA better than he did, may assist.

Ms Kilian said that her understanding was that there was a limitation on the period of a term if one was an acting appointment. She thought it was three months in terms of the LRA, so the issue involved legitimate expectations. She heard what Mr Shelembe was saying, that usually when a new entity was created and another was merged into it ,there was a need to secure the positions of the people who had been in the previous to-be-dissolved entity. That was usually how it happened. Her question therefore was that when it came to an acting appointment, was there a similar obligation or risk, in this case, that a person would have such a legitimate expectation to have an acting appointment confirmed as the permanent appointment of the new entity?

The Chairperson said that it looked like they did not have an answer.

Mr Wiltz said that in his view, there was no risk, because the nature of an acting appointment was that it could be withdrawn -- it was of a temporary nature. Just as the position could be changed today, it could be changed tomorrow right after the Act commenced. It was of a temporary nature and within the discretion of those doing the appointing.

In terms of terms LRA, the underlying section was s187, and it dealt with these circumstances. One would find that in all legislation that made provisions, the LRA applied with or without their legislation. One would find that in legislation, all instances of employee transfers were subject to the same terms and conditions. This was due to the fact that they were not at fault -- they were not to be blamed for the merger or transition. It was a rights issue in favour of the employees. Typically, s197 would say that if a transfer of a business took place, then all the rights and obligations of the employer and employee continue to be in force and the transfer does not interrupt the continuity of employment or the contract of employment and so on. Those issues were really fixed in the LRA.

Prof Claassen asked if they could go back to the definitions on page five. A short definition was a sign of insight into the matter. Therefore, he was extremely happy with the definition of “digital skills,” but thought that they could shorten it even further and change absolutely nothing -- they could just remove the apostrophe.

The Chairperson said they had taken note of what had been discussed. He asked at what stage they would introduce the motion of desirability. 

Ms Ebrahim said that she was under the impression that it had already been done, because she had come a little bit later into the process. The purpose of the motion of desirability was not to go into the detail of the Bill, but merely for the Committee to say that they agreed that they were looking at the subject matter of the Bill, and this was what they were containing themselves to. There was no reason why they could not do it now -- there was no need for a formal report, it just needed to be minuted that the Committee was desirable of looking into the subject matter.

Ms Killian said the reason she had proposed this was because they had the same process in another Committee she sat on. They first deliberated to get a better understanding of the institution that they were to establish, and then they came to the point that they wanted to propose a motion of desirability, and thereafter they were going to get into detail. That would be her recommendation, and then they could look at other apostrophes as they moved along.

The Chairperson asked if there were any objections.

There were none. He said that the motion of desirability was confirmed.

He commended Ms Ebrahim for her work on the Bill and said that she had really assisted the Department in drafting a good Bill. Members must think about what had been discussed and consult their political parties.

Ms Kilian said that they had not had any input from Department of Higher Education (DHET). Could they have clarity on what their role was going to be? She knew the entity had to be registered with the DHET. All entities providing training programmes must be registered, and there was also the provision for courses to be accredited. All of that needed to happen, but it seemed like they were moving without clarity about the level of engagement with DHET.

Mr Shelembe said that the whole concept of the business case had been done in consultation with DHET, with the DG of the DHET entering into an agreement on what the principles behind this entity were. The entity would not provide training itself, as training took place at higher education institutions, which developed the curriculum and got it certified. 

Ms Shinn said that one of her concerns was financing. They had talked about a government grant, and then about donations to top up. What guarantee was there that there was going to be sufficient funding outside of government to fund the Institute? No funders had come to tell the Committee how great this was. They had not even submitted written comments on how essential this was, and that they were willing to support it. Her concern was that this entity was being created and there would not be enough government money to either run it properly or expand it, should there be a requirement to do so, if there was no other external source of income.

Mr Shelembe said that it was a correct observation that currently in the system there was not sufficient funding for e-Skilling, as envisaged in the NDP. However, they were putting together the business case and there would be an incremental provision of funding from government. However, the entity would also seek to leverage on efforts by other organisations to contribute towards it.

The meeting was adjourned.