Post Office turnaround still hinges on new funding and partnerships

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JEREMY MAGGS: The South African Post Office (Sapo) says it’s finally moving out of business rescue and towards becoming a sustainable public enterprise, and this is obviously after years of financial distress, heavy losses and shrinking operations.

But while its balance sheet has improved, cash flow remains under pressure. More government funding may still be needed, and questions also remain about whether a turnaround can survive without continued state support.

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Joining us now is the acting chief executive of the SA Post Office, Fathima Gany. Thank you very much indeed. Do you think the Post Office is genuinely saved or has business rescue just bought you more time?

FATHIMA GANY: I think we need to step back in terms of what are the objectives of the business rescuer. They work within a defined framework of the Companies Act and it’s really to reset the business in readiness.

So when you tick against the criteria, the objectives of what they set out to do, those have certainly been achieved, and it’s about now being positioned to take the business forward.

So can it be saved? Yes, I’m here and I’m saying it can. Differently though, we keep benchmarking ourselves to the prior periods.

So a very different version of a post office, but that would still require a capital injection and whether it’s from the fiscus or Sapo raising [that] itself on its balance sheet or through a partnership.

But it’s not out of the woods in terms of a break even or even profitability. That’s not what the business rescuers have achieved. They have right-sized the business and they have reset the balance sheet in readiness for the next phase of the business.

JEREMY MAGGS: I want to talk to you about what that different version of the Post Office is going to look like. But you do have an unqualified audit. But the Auditor-General is still questioning the Post Office’s ability to continue as a going concern. Difficult to reconcile, surely, those two points of view.

FATHIMA GANY: I’ve come through the ranks of the auditing profession. The unqualified opinion is a very big win for us because it puts credibility for the numbers at a period in time, which is the year end. So those numbers that are now signed off on, you can place reliance on them.

So what does that mean?

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It means you’re in a state of readiness to on board a partner that’s going to conduct a due diligence on you. So in the conduct of the due diligence, they can look at our balance sheet.

They can look at our operations and say, okay, I can place reliance on these numbers. It’s been signed off by the highest service assurance provider in the country.

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Similarly, if you take our balance sheet and we get PFMA (Public Finance Management Act) approvals, and we go to banks and try to raise funding on the balance sheet, banks can place reliance on what we are giving them because there’s now credibility.

So at a point in time, that unqualified opinion makes a big difference.

Going forward and looking at the going concern, that emphasis of matter is really looking to the forward and saying, okay, here we could have an issue because again, the business is not breaking even.

There will be a point where cash, which is a finite resource, is going to run out.

If our partnerships or if our revenue diversification projects don’t take off at the speed that’s required, then we will be looking to the fiscus and saying we need some working capital to keep us at abeyance while this materialises.

JEREMY MAGGS: That’s a difficult one to justify to taxpayers who might want to say, why should we put more money into the Post Office after business rescue?

FATHIMA GANY: Why you should is because the social mandate has never gone away. So the reason why we exist today is because – and it was worth putting the business into rescue and not liquidating it at the time of provisional liquidation – is because there is a social mandate that the Post Office still holds and needs to execute on.

Now, the relevance of the social mandate is declining because mail in its traditional form is a declining mail business, but it’s still relevant for South Africa and its people because not everybody has connectivity to emails and to be able to receive electronic communication.

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So there’s a huge dependency, particularly in the areas that are not urbanised, for the mailman. Our business model is really twofold, it’s the mailman, and then what we call last mile, and then it’s our branches.

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A lot of times we are benchmarked on the branches and so the last mile and the mail business is forgotten.

JEREMY MAGGS: I want to talk to you a little bit about that different version. If I’ve read the data correctly, well over 4 000 jobs have gone, branches have been cut.

Fathima, how much smaller must the Post Office become before the numbers actually start to work? In other words, what is that different version going to look like down the line?

FATHIMA GANY: The version of Fathima is that it can’t be cut any further. Then it’s not relevant. In order to meet that social mandate, the number that we have today, which is, after the Section 189 job losses and after the branch rationalisation, that is the tipping point of I need to be in existence for this.

Now it’s about how you build on it and diversify because you really need commercial activities to supplement the social mandate, which is why you are relevant and why you exist.

So it’s complex and not a perfect science, but you can only build from the number of employees that you have, and you can only build from the number of branches that you have.

It’s pointless reducing it, because where we’re sitting today is unique, we have a national address database and we have a reach, and that is the reason why we deliver on the social mandate, and that’s not gone away.

JEREMY MAGGS: What would you say to private courier companies, Fathima, that argue the Post Office has been kept alive by the state while they have to compete without that safety net.

FATHIMA GANY: Because the private courier companies, and we’ve seen this, we went to market for public-private partnerships in December, and over and above that, we’ve had unsolicited companies coming to us, which we are busy with, it’s a workstream for us and how we onboard, is that the private players are good in the urban areas, and where the Post Office has value for them is in the rural areas, because we have the footprint and the reach.

So it could complement and be a very good marriage between the state as well as these private entities in terms of delivering a holistic courier service to South Africans, because their value proposition is more dense in your cities, and we have the ability in rural areas.

That should be the value proposition and the win-win between both entities.

JEREMY MAGGS: To that point, you have received, as I understand it, strong interest from potential partners. But you’ll agree with me that interest is not revenue. At this point, as we have this conversation, how much of the turnaround is still only a plan?

FATHIMA GANY: A significant amount of the turnaround is a plan because we are coming out of business rescue. So it’s about how do you get the plan in motion and while we have workstreams and there are some activities which have taken off the ground, they’re not the activities that are going to move the needle.

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So bringing on Aarto (Administrative Adjudication of Road Traffic Offences) with motor vehicle licensing or bringing on the new lottery operator, those are good initiatives.

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However, what’s going to move the needle is onboarding a significant partner that complements or supplements our business.

Now, they will have their process and we have our process. You’re absolutely correct in saying yes, we’ve gone to market, we’ve had surprisingly very good traction.

We now have a framework with a transaction advisor on how to onboard the partners. So the next point is, after a request for information, we’re now going to draft requests for proposals and make it tangible. We are still a state-owned entity, so we have to comply with Public Finance Management Act.

These are the things that probably take longer, but you’re doing it in the manner that you should be doing it.

So yes, it’s taking longer, but while we’re speaking, the Post Office is still in motion and so you’re still burning working capital.

Which brings me to yes, that’s where we are in terms of the auditor being concerned that a going concern is something they would like to emphasise on.

JEREMY MAGGS: Just a final question. Assets now exceed liabilities. That’s a good thing. But cash, as you’ve outlined to me, does remain under pressure. How close are you to another liquidity crisis?

Read: The high cost of delaying corporate distress decisions

FATHIMA GANY: We have applied to government on our MTEF (Medium Term Expenditure Framework) funding. I know it’s been deliberated on because I worked on further supplementary information. So we’re very dependent on that, or we’d be having a different conversation if that didn’t materialise.

JEREMY MAGGS: I’m going to leave it there. Acting chief executive officer of the South African Post Office, Fathima Gany, thank you indeed.

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