SA Post Office Standing Committee on Appropriations 28

SA Post Office Standing Committee on Appropriations 28 November 2017

Six months performance overview § Financial Performance § SAPO Group posted a net loss of R 723 million § Revenue of R 2. 3 billion - retention and growth still remains a challenge with tough trading conditions § Expenses of R 3 billion – Staff of R 1. 8 billion (60%) remains the highest cost driver § Cash flow position remains constrained § Working capital and investments in infrastructure remains a challenge § Non-Financial Performance § DTT Project - 401 127 STB registrations and 181 663 STB’s issued to qualifying recipients. § Delivery standard for mail has improved to 88. 04% (Q 1 - 85. 5%) § 115 579 new addresses rolled out to citizens § The Banks Act legislative issues gained traction during Q 2 but the Bank Controlling Company Structure still has to be concluded § Performance objectives achieved 27. 8% (10 KPI’s), however an additional 6 KPIs (16. 6%) performed above 70%. SA Post Office - Restricted 2

Six months performance – 30 September 2017 Income statement Revenue of R 2, 3 billion § § § R 848 million below budget and decline of 2% year on year § R 715 million budgeted revenue for growth initiatives not achieved (No cash to invest in growth) Mail revenue contribution at 62% R 57 million revenue for DTT project R 150 million for motor vehicle licencing revenue (growth of 10%) R 332 million for Postbank interest revenue (growth of 9%) Expenses of R 3 billion § § R 277 million below budget and year on year increase of 2% Staff cost of R 1, 8 billion has declined by 2% (18 485 employees – decline of 244) Interest on loans acquired R 182 million (R 101 million prior year) SAPO has a high fixed cost structure (Staff costs contributes 60%) Net loss of R 723 million § § § Exceed budgeted net loss by R 560 million Increased by R 115 million year Liquidity concerns still remain due to expenditure exceeding revenue SA Post Office - Restricted 3

Year to date performance – 30 September 2017 Statement of Financial Position Assets § Total assets of R 13, 3 billion [31 March 2017 - R 13, 4 billion] § Property portfolio revalued during the previous financial year to R 2, 7 billion Liabilities § R 3, 7 billion long term loans secured by Government Guarantees § § Annual interest cost of R 364 million Bank overdraft repaid in December 2016 Trade and other payables of R 1 billion Subsidy of R 383 million for Government projects (DTT – R 335 m and Address rollout – R 48 m) Postbank § § § NAV of R 2. 9 billion (Retained Earnings - R 2. 6 bn and Share Capital of R 379 m) Cash and short term investments of R 7. 9 billion (Surplus of R 2, 5 bn to match deposits) Deposits from the public increased by 7% to R 5, 4 billion SA Post Office - Restricted 4

Performance summary at 30 September 2017 Strategic Themes Number of KPIs measured Number of KPIs Achieved Q 2 Above 70 Q 2 TOTAL % Q 2 1. Revenue Growth 13 3 4 7 2. Optimise the Cost Base 4 2 0 2 3. Operational Efficiency 8 1 2 3 4. Be a Performance driven Organisation 7 2 0 2 5. Governance and Compliance 2 0 0 0 6. Stakeholder Engagement 2 2 0 2 Total number of KPIs 36 10 6 16 27. 8% 16. 6% 44. 4% % of KPIs Achieved Only 10 KPIs (27. 8%) of the performance measures were achieved during Q 2 due to program/project implementation delays and funding constraints. However an additional 6 KPIs (16. 6%) performed above 70%. Detail on KPI’s included in Additional Slides AS-01 to AS-03 SA Post Office - Restricted 5

Performance summary at 30 September 2017 The 6 additional KPIS performed above 70%, as follows: § Revenue Growth § Revenue of R 1. 132 billion achieved 71. 6% of budget § Percentage of customer complaints resolved within 7 calendar days achieved 83. 7% of target § Net interest income for Postbank achieved 95. 6% of target § Increase in Depositors accounts achieved 89. 3% of target § Operational Efficiency § Upgrade of Enterprise Business systems achieved 85. 7% of target (International Parcel System, Windows operating system, SQL Database) § The Mail Delivery Standard achieved 95. 7% of the target (Improved to 88. 04% from 73. 6% at 31 March 2017) SA Post Office - Restricted 6

Funding requirements and sources of funding (Excludes SASSA Project) Funding required Settle Creditors Cash flow shortfalls 2018 FY Capex Investment Repay Loan Cash flow shortfalls 2019 FY TOTAL R 350 m R 600 m R 1 bn R 600 m R 3. 5 bn 9 months 6 months Nov 17 Mar 18 Jun 18 12 months Sept 18 Dec 18 Mar 19 R 400 m R 1 bn R 500 m R 1 bn R 3. 9 bn Overdraft facility Retain Loan facility Postbank Excess Capital SAPO Retail bond SAPO Property bond TOTAL At this stage these proposed sources of future Capital have been discussed, but not approved by DTPS, SAPO Board or the Minister R 400 m Surplus Sources of funding SA Post Office - Restricted 7

Funding requirements …. Bond issue § SAPO Property bond of R 1 billion (Not yet approved) § § The property portfolio has been revalued to R 2, 7 billion Guarantee not required from National Treasury Property portfolio as collateral for the debt Funding to be utilized to repay the interim loan facility of R 1 billion retained for capex § SAPO Retail bond of R 1 billion (Not yet approved) § § 10 year term and guaranteed by National Treasury Bonds issued would need to be listed on the Bond Exchange SAPO could consider offering the issue through the SAPO branch network National Treasury would effectively be underwriting a higher yield (than the deposit rate) to citizens instead of Commercial Banks SA Post Office - Restricted 8

Recapitalisation and guarantee requirements § Recapitalisation funds of R 3, 7 billion § Borrowings of R 3, 7 billion with Government guarantees § National Treasury proposed settlement of R 3, 7 billion loans acquired § Eliminate exposure on Government Guarantee and cancellation of current Government Guarantees § Alternate Guarantee requirements § R 400 million for overdraft facility § R 1 billion interim guarantee for capex until the Property bond is issued (Proposed) § R 1 billion for SAPO Retail bond Guarantees reduced from R 3. 7 bn to R 1. 4 bn SA Post Office - Restricted 9

Envisaged SAPO Corporate Structure (Board supported) Government 100% Capital and Technical Partners >50% E-Commerce Revenue 2018: - R 383 m Revenue 2020 - R 1, 109 m [Including Courier revenue share] SAPO Properties 100% Mail (incl. Retail) Revenue 2018 - R 4, 439 m Revenue 2020 – R 5, 036 m 100% Bank Controlling Company Potential acquisitions >50% Postbank New Revenue Streams [SASSA, Government and Lending] SA Post Office - Restricted Revenue 2018 - R 693 m Revenue 2020 – R 3, 982 m Revenue 2018 - R 883 m Revenue 2020 – R 1, 086 m 10

Strategy going forward - Postbank Mandate: § National transactional bank for Government § Financial inclusion and bridge unsecured lending gap, through new methods of properly risk assessed loans to the unbanked, especially SMEs Challenge: § Over-capitalized with limited growth prospects without lending functions § Building credit capacity and systems takes time and money – we need to get started § National Treasury support has not been finalised Alternative growth strategy: § Acquire existing bank with lending infrastructure and expertise alternatively pursue consolidation of second tier banks Postbank: Driver of Financial Inclusion and Economic Transformation Through Lending SA Post Office - Restricted 11

Government Department or Competitive Business? SAPO is a national infrastructure asset which must be leveraged to assist in the delivery of Government mandates § Critical success factors: § Resolve capital structure (equity injection) § Split Development (subsidy) and Commercial (profit) mandates § Position Postbank to compete § Implement E-Commerce capabilities § Private – Public partnerships (Banking, E-Commerce & Courier) § Address cost structure (Optimal staffing, diverse revenue streams) Government subsidy to fund the developmental mandate Capital and technical partners to fund the commercial mandate SA Post Office - Restricted 12

End of presentation Additional Slides 13

Performance Objectives Q 2 AS-01 Revenue Growth • Revenues of R 1. 13 bn (71. 6%) has been achieved against a target of R 1. 58 bn for Q 2. Whilst customer behavior is changing from traditional postal the growth initiatives are focused on parcels, E-Commerce and Digital. Investment in systems and solutions remains key to unlock market potential. • Marketing campaigns have been planned but deferred due to the funding challenges. • 67% of customer complaints resolved within 7 days against a target of 80%, making the achievement 83. 7%. A project to install a new complaint management and telephony system is underway to address the operational challenges at the Call Centre. • The current funding shortfall is delaying the achievement of objectives to address new products, Digital and ECommerce products, services and solutions. • Complaints have been lodged with ICASA on infringements within the postal sector to stop the revenue leakage. SAPO still awaits the confirmation of a date for the hearing from ICASA. • Postbank revenues achieved R 53 m against a target of R 49 m, exceeding budget by R 4 m. Strong performance contributed by the increased transactional fees and the increase in the number of transactions ECDPW and DEA beneficiaries paid through Postbank. • The Postbank depositor accounts increased by 0. 67% against a target of 0. 75% during Q 2, an achievement of 89. 3% whilst increasing the number of accounts to 5, 807, 672. Postbank plans to revisit its consumer value proposition with the aim of increasing customer base and progressing financial inclusion of the mass market. SA Post Office - Restricted 14

Performance Objectives Q 2 AS-02 Optimise the Cost Base • Expenses performed at R 1. 50 bn against a target of R 1. 61 bn, below the target by R 109 m during Q 2. • Cost optimization yielded results and prudent cost containment measures will be maintained for the year. • In contributing to a sustainable environment SAPO reduced carbon emissions by 2. 13% against a target of 0. 75% during Q 2. Operational Efficiency • The delivery standard for mail has increased to 88. 04% in Q 2 from 85. 5% in Q 1 due to the improvement in operations. • The Postbank achieved uptime of 99% against a target of 98%. Introduction of effective controls in terms of monitoring and remediation of incidents had assisted in maintaining a stable uptime percentage. Be a Performance driven Organisation • A total number of 625 employees were trained against a target of 1, 160 during Q 2 on compliance related training such as FAIS, FICA and OHSA. The non-achievement of the target is related to the lack of funds. • SAPO targeted to populate 244 critical positions during Q 2 of which 173 vacancies for branch managers have been advertised and 37 other positions are in various stages of the selection process. • Management Performance contracts alignment and finalisation remains low at 33% against a target of 90% for Q 2, which improved to 49% at 4 Oct 2017. Executives are driving the process to be completed during Q 3. • As part of the broader Change Management program The 5 Principles of Ethical Behaviour was launched during July 2017 to ensure buy-in and the culture being changed to one of living ethical behaviour. SA Post Office - Restricted 15

Performance Objectives Q 2 AS-03 Governance and Compliance • The outstanding Audit findings have been reduced, by 84 items, from 377 in Q 1 to 293 in Q 2 despite not achieving the target in Q 2. The Management Letter Action Plans are being concluded by all units to drive the resolution of audit findings by yearend and thus improve the control environment at SAPO. • Irregular expenditure amounts to R 745 m at Q 2. An amount of R 428 m relates to the 2015/16 FY and R 317 m for the 2016/17 FY. All incidents are reported at the Financial Misconduct Committee (FMC) after which submissions for approval. Investigations by Supply Chain Management revealed that most irregular spending relates to legitimate business expenses. There has however been non-compliance to established processes. These non-compliances have been mitigated by weekly reviews of transactions to monitor adherence and execution of controls, blocking of vendors amongst other interventions. Stakeholder Engagement • • In an effort to improve International Relations SAPO participated in various successful events during Q 2 – • The ECOM@AFRICA MISSION TO SOUTH AFRICA (Operational Readiness for E-Commerce at JIMC 10 -14 July 2017, • The Lesotho visit for Benchmarking on operational matters on site visit at JIMC on 8 August 2017 and • The SADC Minister’s Forum during 4 -7 September 2017 Engagements with labour continue as they are critical partners in business resulting in a stable work environment. The substantive negotiations on salary and benefits have reached a deadlock due to the continued weak financial position of SAPO. SA Post Office - Restricted 16

Critical Infrastructure Investment AS-01 Investment in infrastructure ‘R’m Retail point of sale system 150 Track & trace system 30 Track & trace POD and equipment 60 Mail centres automation including JIMC 100 Ecommerce 150 SAP and system improvements 100 Revenue projects (Commercial) 130 IT infrastructure 150 Fleet and transport systems 130 Total SA Post Office - Restricted 1 000 17