Department Quarter 3 & 4 performance; iKamva National e-Skills Bill: briefing

Meeting report

Department of Posts and Telecommunications Services (DTPS): Q3 and Q4 performance

Mr Robert Nkuna, Director General: DTPS, said there had been three areas in which the DTPS had not achieved targets during the third quarter, due mainly because of interdependencies, but that these had been attended to. These were an agreement that was supposed to have been be signed with the Universal Postal Union (UPU) which had not occurred because the Department needed to get the input of legal services first. It had also not signed an agreement with IBM on an e-skills programme because IBM had wanted, as a condition, that the Department take responsibility if course members accessed illicit content. This the Department had not agreed to. The third area had been not attaining broadband connectivity targets, but he felt that the Department had turned a corner. The Department had signed an agreement with the Development Bank of SA (DBSA) on financing SA Connect, and entities had invited industry to come on board for the roll out of SA Connect.

Mr Farhad Osman, Chief Director: Strategic and Performance Management, DTPS, said the Department had achieved 16 of its quarterly targets, while 5 were not achieved. This was a 76% achievement rate. The areas of under achievement were:

• the Department was not able to commence with the migration of staff, as the revised organisational structure has not yet been finalised;
• the main implementing stakeholder to agent meeting could not take place before the end of the third quarter for the implementation plan of the BRICS Institute for Future Networks;
• the approval of the World Telecommunication Development Conference (WTDC) position paper was confirmed only after the close of the quarter, via submission of relevant supporting evidence;
• the approval of the UPU position paper was confirmed only after the close of the quarter, via submission of relevant supporting evidence.
• the broadband connectivity target, of an additional 1000 identified sites, was not met.

 Ms Joy Masemola, Chief Financial Officer (CFO): DTPS, said 91% of the budget had been spent.

Mr Osman that in the fourth quarter, 14 quarterly targets had been achieved, while five were not achieved, which was a 74% achievement rate. The areas of under achievement were:

• the Department was not able to migrate staff as the revised organisational structure had not yet been finalised;
• the partnership agreement with IBM could not be timeously finalised;
• the corporation agreement between the South African Post Office (SAPO) and the UPU was not finalised as planned;
• the connectivity target to an additional 700 identified sites was not met; and
• the funding options for phase 2 implementation could not be finalised, as the memorandum of understanding (MoU) between DTPS and DBSA was yet to be concluded.

Ms Masemola said 94.5% of the budget had been spent.

Discussion

The Chairperson wanted an explanation on the two matters arising from the Auditor General’s (AG’s) report that were not scheduled for implementation by the Department. He felt that as they had been mentioned in the AG’s report, they should be attended to. What would happen to similar matters in 2018/19?

Ms Masemola said the two matters related to performance agreements that had not been submitted on time. The finding by the AG was that no corrective measures had been taken. In terms of controls, the disciplinary process was not complete, and the Department was still awaiting the final verdict. She said there was still one official who had not submitted a performance agreement, and Human Resources had implemented controls.

The Chairperson asked for the name of the official who had not handed in a performance agreement.

Mr Nkuna said the official’s name was Mr K Lesecha, who had since resigned. He said that when performance management contracts were signed, he had considered whether the individuals needed any assistance regarding capacity. He had looked at why things were not done, whether it was because of a lack of skills or insubordination or a mismatch. In future, these matters would be more formally raised.

The Chairperson said the matter was a case of incapacity for the position, rather than an offence.

SA Post Office (SAPO)

Ms Nichola Dewar, Group CFO: SAPO, said operations had not been stabilised and there were liquidity issues. SAPO had raised a R400m bridging loan in December 2017 to settle creditors’ accounts. A R3.7 billion equity injection received from the DTPS had been used by SAPO to pay off loans. It was still incurring costs of R733 million in delivering the public service mandate at a fixed fee. If the R300m interest on loans was added, then the total came to R1 billion in provisional losses for the year. Revenue had stabilised, costs had been controlled and year on year losses had been stabilised. There had been progress on audit issues, which had decreased from 11 in 2016/17 to three in 2017/18, and SAPO was on track to having no qualifications for 2018/19.

Mr Trevor Ndlazi, Group Executive: SAPO, said the organisation was experiencing a liquidity crunch. Revenue growth still remained slow and was not growing as anticipated. The shortfall in revenue to meet operating expenses on a monthly basis added pressure, with critical supplier payment backlogs. Costs were being managed to offset revenue shortfalls. Total registrations of set-top boxes (STBs) had increased to 553 071, and 275 897 STBs had been issued. Staff had decreased by 266 to 18 296, contributing to cost savings. Engagements with labour had continued, as they were critical partners in business. The negotiations on salaries and benefits had reached a deadlock due to the continued weak financial position of SAPO.

SAPO had moved out of the rented Eco-point premises during December and January 2018 into the National Postal Centre, yielding rental savings of R4 million per month. The delivery standard for mail stood at 86.5% due to the December holidays, non-operational machines and a shortage of bicycles.

Management had prioritised the clearing of backlogs. The performance objectives rating for the quarter had been 35.3%. The SA Reserve Bank (SARB) had provided feedback on Postbank, and legislative changes to the Banks Act needed to be approved and implemented. National Treasury was in the process of tabling the Banks Act changes to Cabinet. SAPO was finalising the Bank Controlling Company (BCC) application. The SAPO group had posted a net loss of R267 million. Revenue of R1.16 billion was R588 million below budget. Although a net loss of R144m was planned, the revenue shortfall remained a key contributor to the net loss of R267m for the third quarter.

During the fourth quarter, SAPO had continued to operate in a highly constrained financial climate which had restricted revenue retention and growth. Staff had decreased by 175 employees in the fourth quarter and the filling of critical positions had been prioritised over other recruitment, which had been put on hold. A total of 686 150 qualifying applicants had been registered and 356 402 STBs had been issued. Postbank was engaged in talks with the Department on the critical legislative change requirements in the Banks Act, and finalisation of the BCC structure. The SAPO and SA Social Security Agency (SASSA) integrated project team were fully operational and the project was on track. Performance for the quarter was rated at 34.5%, due to project implementation delays.

Revenue had missed its target by R193m and this revenue shortfall remained a key contributor to the net loss of R72m. There had been a decline in expenditure of 8% from the prior year, but some of the expenditure reduction was due to deferment of spending. The SAPO group had posted a net loss of R1.062 billion for the preliminary period ended 31 March 2018. The loss was attributed to revenues performing R1.945 billion below the year’s target. This had increased the monthly deficit to meet operational expenses, which had placed additional pressure on the constrained cash position of the organisation. SAPO had secured a term loan facility of R400m, part of which would be used to pay critical suppliers to sustain operations.

There was a greater focus on ensuring that people did what they were supposed to do, and progress had been made. SAPO suffered from legacy systems which had not necessarily been updated or kept up to date, so it had a choice to leapfrog, by entering into agreements and using, or leveraging off, up to date systems of partners. 

On supporting improvement of controls, Ms Dewar said SAPO as a group was looking at and analysing transactions to find out the root cause of why audit issues had been raised. 

On what could be done practically, Mr Nkuna said he had asked SAPO to present a budget so that the Department could take it to Treasury, and he was hoping to get funding.

SAPO had made strides on e-commerce, and in the new financial year it would operate as an e -commerce hub in South Africa. A pilot project would be launched soon.

The challenges facing Postbank were not only the Bank Control Company, but also the Banks Act. He had asked Minister Rob Davies to interpret the Bank Act, and the Minister had replied that the Act was not meant to discriminate against, or exclude, state-owned entities (SOEs). The DG had taken the letter to the SA Reserve Bank (SARB), but SARB said that it had worked on what was in the Act. There was thus the risk that the licence application might expire.

Mr Ndlazo said he had been engaging with SAPO and the Postbank, because the Postbank used SAPO infrastructure. If SAPO collapsed, then the Postbank would go down with it. The discussions were on how Postbank could invest in infrastructure that it needed, and what the critical areas were where Postbank needed to assist.

Discussion

Ms J Kilian (ANC) said that Postbank could not piggyback on SAPO -- it had to develop its own agreements with SAPO, for example on rentals. She asked why the Department was always reacting so late to crises. The EFF had tabled an amendment to the Banks Act. What was the DTPS doing to expedite changes to the Banks Act regarding Postbank? There was no operational efficiency. SAPO kept claiming that they did not have money, therefore they did not meet their targets. She felt frustrated that ideas were not implemented and that there was a zero percent achievement of certain goals.

Mr C Mackenzie (DA) said SAPO was in a vicious circle, and there did not appear to be a way out. Regarding the Eco-point lease, he asked if the Special Investigating Unit (SIU) investigation had been finalised and whether civil or criminal charges had been laid against anybody. Had steps been taken to recover monies lost?

He said the Department had costed the public service mandate subsidy to be R730 million per annum, but the previous subsidy had been R200/R300 million per annum.  Why was there a big difference between the two numbers? What was the optimal staff complement SAPO was looking at? He said there had to be a public participation process if SAPO was thinking of changing the Bank Act legislation, so there was no time left, or SAPO would have to restart the application process from scratch. Was there a Plan B? Where was non-compliance taking place -- in the middle, or junior ranks? On Digital Terrestrial Television (DTT), he said he had seen that the budgets of the Universal Service and Access Agency of South Africa (USAASA) and the Universal Service and Access Fund (USAF) had been cut this year. Had that been factored in? What would the e-commerce hub’s impact be on revenue?

Ms D Tsotetsi (ANC) said the overall progress of SAPO was like a mirage.

Mr Ndlazi said he could not comment on Eco-point

Ms Dewar said that SAPO had received a letter from the landlord of Eco-point cancelling the lease, and stating that SAPO had to leave by 5 January. SAPO had moved to its own property, but SAPO had still received invoices for January, February and March. The landlord had said that they were suing the Post Office for damages, not for rental.

Mr Ndlazi said he did not know whether charges had been brought against anyone.

On the difference between the Universal Service Obligation costing figures, he said that previously subsidies, in 2012, had been R300 million for capital expenditure to build branches in rural areas, but there had been no provision for operational expenses. The subsidy request to Treasury had been based on a calculation of an area’s ability to support the functions it was offering.  He said the post offices in unsustainable areas, where people had money to pay only for food and education, should be looked at differently.

Ms Dewar said that it was not a subsidy -- it was an agency fee on a commercial basis.

On the optimal level of staff, Mr Ndlazi said SAPO had worked on scenarios at the current revenue levels, which would mean a reduction of staff of 4 000 to 5 000 people.

Ms Dewar said that with the SASSA contract ,there had been an increase in the number of tellers at branches, who had been taken from mail room operations. The tellers had been mostly internal hires transferred via upskilling and training.

On a Plan B for Postbank, Mr Ndlazi said that the process was out of their hands and if the application was unsuccessful, SAPO would have to reapply from scratch.

He said SAPO did have a philately division, dealing with stamps.

On other areas of non -compliance, this had to be seen in context. A culture of performance management had not existed before, and now staff had to report and record what they were doing. It was a two-year process. It was not a matter that the personnel did not want to do it, it was just a matter of implementing it over a period of time.

On the DTT question, Ms Dewar said that SAPO still had R400 million held in a trust account, so it was all right for the next year and a half. It would submit a funding request in the medium term expenditure framework (MTEF) submission for the next financial year. 

Mr Ndlazi said the SASSA project had increased in scope.

Ms Dewar said SAPO was anticipating net profit of R170 million in the current year, and that would grow to R250 million in the next year -- and ultimately to as much as R400m-R500m. She had it on good authority that Treasury was saving billions by using SAPO.

E-commerce was expected to generate revenue of R100 million, with growth on the continent running at 20% and with total sales of R2 billion. SAPO was seeking to expand markets for both the small entrepreneur and existing retail e-commerce. It was working on a 5% growth figure as a conservative projection of growth.

Mr Ndlazi said outstanding rentals amounted to R135 million, and SAPO was managing it. SAPO had a schedule from which they were working on identifying all the properties on which they owed.

On incentives for performance, he said that advancement within the company would be dependent on a person’s performance. SAPO wanted to move away from a perception that staff only needed to perform to get a bonus, towards one which said that if one performed, the prospects for moving up in the organisation improved. One needed to perform in one’s current job to increase the chances of getting a better job. Changing the culture was a process, and one could not expect overnight changes

The public service mandate played a big part in the stagnancy of the post office, because SAPO was using revenue to fund that mandate. SAPO had to deliver on its public service mandate, but because it was unfunded it meant that revenue that came in was used to cover costs incurred by the mandate. The question was how to fund the mandate. In other countries, governments used the post office to deliver parcels or an identity document, for example. There should be a symbiotic relationship with government.

Mr Mackenzie asked for a letter to be sent to the Committee detailing the stock levels of STBs per province.

Ms Tsotetsi said she hoped to see the e-commerce business growing.

Ms Kilian said SAPO had a role to play to fulfil Department of Home Affairs’ (DHA’s) services. She asked why government went to the private sector and not to public companies. Had there been any engagement with the DHA?

Mr Mackenzie asked if the Department could give a presentation on the e-commerce hub.

Mr Ndlazi said the Post Office had had talks with the DHA. The challenge was that there was a commitment to use the private sector, because there had to be a tender process.

Ms Dewar said that the tender requirements of the Public Finance Management Act (PFMA) should not override the Intergovernmental Fiscal Arrangement (IGFA).

Mr Nkuna said that in the meantime, SAPO had to become more efficient because pricing played a big role. The Department was willing to meet with the Committee and the Finance Committee on the Postbank matter to get the one-line amendment to the Act that it needed. The Department of Human Settlements could, for example, co-locate within post offices.

The Chairperson said he would see if a meeting could be arranged, but said that it would be difficult given that it was near the end of the second term. The meeting arranged for the following week had been cancelled.

Ikamva National E-Skills Institute (INESI) Bill

The Chairperson said he wanted the legal advisors to walk the Committee through the document.

Mr Alf Wiltz, Chief Director: Telecommunications and IT Policy, DTPS, said that clause 1 dealt with the establishment of INESI. The Companies Act did not apply to INESI, so the primary source of governance was this piece of legislation.

Clause 2 dealt with the integration of the three bodies – the National Electronic and Media Institute of South Africa(NEMISA), the e-Skills Institute(e-Si), and the Institute for Satellite and Software Applications (ISSA) -- to form INESI, and that the PFMA would apply. He said INESI was a national public entity falling under schedule 3.

Clause 3 dealt with the purpose and objects of INESI -- what its mandate was and its role as a catalytic converter. The purpose of INESI was to act as a national catalytic collaborator, facilitator and change agent for delivering e-skills through scaling in the country.

Clause 4 was more specific, and dealt with the functions INESI performed. It was not a university or a higher education institute. It indicated the things INESI ‘must’ do as contrasted to clause 5, which indicted what INESI ‘may ‘do.

Clause 6 dealt with the establishment of a board, which was comprised of executive and non-executive members.

Clause 7 dealt with the term of office of members, clause 8 with the disqualification and removal of board members, clause 9 with the disclosure of interests of members, clause 10 with remuneration of board members, clause 11 with board meetings, and clause 12 with the dissolution of the board.

Clause 13 dealt with the appointment of a chief executive officer (CEO) and a chief financial officer (CFO), clause 14 with the termination of a CEO or CFO, clause 15 with the appointment of an acting CEO or CFO.

Clause 16 dealt with employees of INESI, clause 17 with the funding of INESI. Clause 18 with the annual report that had to be submitted, based on the PFMA, and clause 19 with compliance to the PFMA.

Clause 20 dealt with the regulations the Minister may make, given that INESI was a national body.

Clause 21 dealt with the transitional arrangements in combining the three entities, and clause 22 covered the short title of the bill and when it would commence.

Ms Phumelele Ngema, Parliamentary Legal Advisor, asked if the socio-economic impact assessment report had been done. She said that the question of what type of entity INESI was, had already been answered by Mr Wiltz -- that it was a schedule 3 entity which made it a national entity. She agreed with the Department on the tagging of the bill as a section 75 bill. She asked what the term ‘socio-eco profile’ in clause 6(8) meant. She asked if clauses 13-16 meant that employees and executives would be subject to the Public Service Act.

Discussion

Ms M Shinn (DA) said she had doubts over the necessity to establish a body such as INESI, and this had been confirmed by the fact that there had been no submissions from the private sector. Neither the funding nor what the costs of INESI would be were clear. The business case for INESI had mentioned bodies such as the United Nations Development Programme (UNDP) and South Korea, but none of them had commented on the Bill, nor had there been a strong motivation from the information communication technology (ICT) sector, and it appeared to be an exercise to save the jobs of people employed in NEMISA.

The Chairperson said that the matters raised by Ms Shinn should be held in abeyance for the Department to answer.

Mr Mackenzie asked if the board establishment of between six and ten members, included the chairperson and deputy chairperspm. Was the term of office of not more than two years in clause 7(2) applicable for the CEO as well? In the clause dealing with disqualifications, one had to be a South African citizen, yet this was not mentioned in the clause dealing with appointments. He asked if the clause on the payment of salaries was a standard clause.

Mr Bongani Ngcobo, Director: Legal Services, DTPS, said he had indicated at a previous meeting that the socio-economic impact assessment study had been done.

Mr Wiltz said that apart from the six to ten members, the board included the chairperson, the deputy chairperson, the CEO and the CFO, so the board numbers would range from ten to 14.

Mr Mackenzie asked if it would not be better to use the terms ‘executive’ and ‘non-executive’ members in the clause.

Mr Wiltz said it was possible -- it could be redrafted.

He said that it was sufficient to leave the requirement of being a South African citizen only in the disqualifications section, and for it not to be included in the appointments section.

He said SOCs were all aligned to the Public Service Act, but he could refer to colleagues on the matter.

NEMISA was not subject to the Public Service Act, but would align itself with what was paid in the Public Service Act. NEMISA had applied to join the Government Employees Pension Fund (GEPF).

On clause 21(8), he said that if policies were deemed prescribed, his understanding was that NEMISA may have adopted their own policy, and the clause tried to continue this recognition of the old policy until the new body, INESI, made its own policy.

On clause 6(8), he said he was not sure of the answer on what the socio-economic profile meant. It might be linked to sub-clause 4, but this was not clear.

Ms Nomvo Ngcenge, State Law Advisor, responded on clause 6(9), and said that some of the matters were policy issues, but she would deal only with the legal issues. The term socio-economic profile might refer to the demographics of the country, in that it contained many races with some being disadvantaged, and the legislation was looking to include the latter. In her opinion, the term was a little bit vague and the phrase could be taken out because there were already requirements that had to be met.

The Chairperson said it would be flagged for further consideration. He asked for an explanation of the term ‘due responsibilities’ in clause 6 (9), as it was not defined. He said the Companies Act elaborated on what due responsibilities meant. Where would the meaning of the term derive -- from this act or from the Companies Act?

Mr Wiltz said it was a question of mirroring what was in the Companies Act, but he agreed that it was not clearly outlined.

On clause 5(3)(f), Mr Mackenzie said that the term ‘establish ICT networks’ could mean anything. Could an explanation be given for what was meant by ‘network’?

The Chairperson said the same applied to other terms such as ‘digital multimedia,’ for example.

 Ms Shinn asked when the meeting on the fourth industrial revolution would take place.

The Chairperson said that it would be left for the next term.

The meeting was adjourned.