SA Post Office (SOC) Limited Annual Report for the year ended 31st March 2017 Portfolio Committee on Telecommunications and Postal Services 5th October 2017

Introduction by the Chairperson of the Board The slow economy placed considerable pressure on the recovery and growth within the postal sector. Significant progress has been made in restoring the public image of SAPO. Funding was sourced from Commercial banks and National Treasury to pay long outstanding creditors to restore operations and settle historical salary obligations that ensured a stable labour environment. Critical senior executive positions of CFO, COO and Company Secretary have been finalised to strengthen governance. The ship is steadily turning with an improvement in service delivery, a focus on culture change and improving the control environment – the work done in improving controls resulted in the reduction of Qualifying Audit items from 11 to 4 during the year. A culture of High Performance is at the centre of driving improvement at SAPO. The Postbank license submission will move South Africa closer to the establishment of a State Bank to stimulate the economy and contribute toward financial inclusion. The postal sector is to reinvent itself and diversify its offering to remain relevant to its customers and the South African economy. Going forward it is necessary to revisit the recapitalisation of SAPO with the view of making the Post Office self-sufficient and sustainable.

Highlights for the year ended 31 March 2017 Income Statement Revenue declined by 4,1% from R4,7 billion to R4,5 billion Expenses reduced by 3,8% from R5,8 billion to R5,6 billion Loss for the year before taxation improved by R153 million (13,8%) from R1,1 billion to R959 million Statement of Financial Position Property portfolio revalued by R1,6 billion during the year to R2,7 billion NAV improved from a negative of R242 million to R1 billion R650 million capital injection R1,6 billion surplus from revaluation of property portfolio R978 million net loss for the year

Highlights for the year ended 31 March 2017 Human capital management Labour environment stable during the year 5 912 casual employees converted to permanent employees Staff numbers reduced by 2 052 from 20 781 employees to 18 729 employees Continuously trying to up-skill employees to meet customer requirements Operations Mail - delivery standards improved by 12% to 73,6% indicating the steady progress made in restoring operations Retail - The 2 222 points of presence (1 520 post offices and 702 postal agencies) remained operational, with improved stock levels, during the year. Postbank Section 16 application made to SA Reserve Bank Initial Board of Directors appointed Compliance Critical vacancies finalised - Chief financial officer appointed 12 December 2016, Chief operating officer appointed 5 June 2017 and Company secretary appointed 1 August 2017 SAPO adheres to statutory requirements and meets the reporting timelines

Audit findings for the year ended 31 March 2017 At the center of the business turnaround is the improvement in controls and governance The interventions implemented during the year resulted in the reduction of key findings shown below 31 March 2016 31 March 2017 Qualified audit opinion 1. Property plant and equipment 2. Contingencies 3. Irregular expenditure 4. International revenue 5. Site restoration 6. Fruitless and wasteful 7. Deferred tax and income tax 8. Heritage assets 9. Related parties 10. Operating loss 11. Total assets Target for 31 March 2018 – unqualified audit opinion

Income statement for the year ended 31 March 2017 Revenue declined by 4,1% to R4,5 billion Mail revenue contribution at 71% Operating costs reduced by 3,8% to R5,6 billion SAPO has to deal with the agility of the cost structure to ensure fiscal discipline Staff cost increased by 5,9% from R3,5 billion to R3,7 billion Conversion of 5 912 casual staff to permanent employees Staff numbers reduced by 2 052 from 20 781 employees to 18 729 Includes 768 employees that took voluntary severance packages Settlement of long outstanding staff liabilities Finance costs includes interest cost of R283 million for the loans acquired Operating loss reduced by R166 million (17%) to R807 million [Operating loss excludes finance revenue, finance costs and fair value adjustments] Loss before taxation reduced by R153 million (13,8%) to R959 million

Statement of Financial Position for the year ended 31 March 2017 Total assets of R13,3 billion [31 March 2016 - R10,1 billion] Property portfolio revalued during the year to R2,7 billion Equity and liabilities Capital injection of R650 million NAV improved from negative R242 million to positive R1 billion Liabilities Long term loans increased by R2,7 billion to R3,7 billion Bank overdraft repaid [ 31 March 2016 – R229 million] Trade and other payables decreased by R605 million to R888 million [Settlement of long outstanding creditors] Deposits from the public increased by 4% to R5 billion Resolve capital structure

Statement of Cash Flows for the year ended 31 March 2017 Cash utilised by operations increased from R686 million to R1,7 billion Settlement of long outstanding creditors Settlement of staff liabilities Voluntary severance packages Capital expenditure of R54 million Postbank cash and short term investments of R7,6 billion Deposits from public of R5 billion Surplus of R2,6 billion Financing activities R650 million capital injection Increase on loans of R2,7 billion to R3,7 billion Repayment of the overdraft facility SAPO excluding Postbank cash of R985 million R687 million available from loan funding R266 million of unutilised subsidy (DTT and address roll out – ring fenced) Liquidity concerns still remain due to expenditure exceeding revenue

Utilisation of loans and capital injection as at 31 March 2017 Utilisation of loans and equity injection Amount (R’ M) Roll over previous loans and accrued interest 1 133 Banking fees and settlement costs 27 Settlement of creditors 1 323 Staff costs including voluntary severance packages 602 Statutory payments [PAYE, PAYE, medical aid] 95 Repayment of overdraft 260 Interest payments 283 Total utilised 3 723 Less interest received 60 Total 3 663 Funding [R650 million plus R3,7 billion] 4 350 Remaining funding as at 31 March 2017 687

SAPO making steady progress Year in review + - Labour stability Qualified audit opinion (improvement) Conversion of 5 912 casual employees to permanent employees JIMC operations not yet optimal Growth of 4% in Postbank depositors funds 215 000 new customer accounts Branch network and operations Not efficient / optimal Confidence in frontline services Postbank Section 16 application to SA Reserve Bank Initial Board appointed Decline in Corporate Revenue Improvement in Mail delivery standards by 12% to 73,6% Balancing the development and commercial mandate Capital structure SAPO making steady progress

Annual Performance Indicators Number Percentage Total number of performance indicators 18 100,0% Performance indicators achieved 5 27,8% achievement over 70% 9 50,0% Sub total 14 77,8% Performance indicators not achieved 4 22,2% The loan funding was received in July 2017 instead of April 2017. The delayed start in the recovery, deferred some of the outcomes to the 2017/18FY.

Annual performance indicators summary Performance Indicators Summary as at 31 March 2017 Strategic Themes Number of KPIs measured KPIs Achieved Q1 Q2 Q3 Q4 Year 1. Increase and Diversify Revenues 4 2. Cost Management 1 3. Improve Operational Efficiency 2 3 4. Sustainable Delivery of Social Mandate 5 6 7 5. High Performance Organisation Total number of KPIs 14 16 18 % of KPIs Achieved 28.5% 25% 22.2% 27.8% Increase and Diversify Revenues Although revenue targets were not achieved and despite an overall decrease in volumes the Base Case revenues of R4bn performed at 80.6% of the target. SAPO has not managed to grow government revenue initiatives, although SAPO has been tendering for government work. Initiatives to grow private sector revenue are underway with customised offers to key clients e.g. Home Choice, Multichoice, Mr Price etc. Cost Management SAPO met the cost target through prudent cost management that achieved R1.4bn budget savings to off-set revenue shortfall.

Annual performance indicators Improve Operational Efficiency The target was achieved for the IT customer satisfaction index that performed at 3.9%, above the target of 3%. The Postbank target was not achieved at 97.02% against the industry standard of 98% uptime for ATM and POS transactions. The target for Building resilience into SAPO’s IT connectivity was not achieved as this is dependent on the Managed Network Services project, which is currently underway. Sustainable Delivery of Social Mandate Postbank achieved the target to increased financial inclusion through the growth in depositor accounts by 172 359 new accounts, reaching 5.7 million bank accounts. Although the target was not achieved the Mail Delivery Standard performed at 73.6% against the target of 92%, an improvement from the 61.2% achieved in the prior year contributed by the restoration of operations. High Performance Organisation Although the target was not achieved at 100%, the Performance contracts have been concluded for 88% of management staff and 74% of evaluations done. Despite not achieving the target to eliminate all High and Medium audit findings, a program has been initiated in the new financial year to reduce the audit findings and improve the control environment within SAPO. For the year SAPO achieved 5 of the 18 KPIs with an achievement of 27.8%, however 9 of the 18 not achieved fully, were achieved at over 70%.

SAPO that is relevant in the South African economy Key Focus Areas for 2017/18FY Branch network and operational efficiency Postbank licence SASSA grants readiness Re-launch a competitive courier business Invest to become the e-Commerce hub of choice for Africa Become Government’s delivery partner of choice SAPO’s capital structure should have been addressed by 2020 The USO and Social Mandate will be funded by government SAPO that is relevant in the South African economy