Let’s be frank
The sound of the SA Post Office bleating about its financial 2006 R431m operating profit last week was deafening — almost loud enough to make one forget it will still be getting a R1,1bn bailout from government over the next three years.
On the face of it, the bleating appeared justified. The Post Office delivers 6m items a day, pays 560000 social grants every month and has an emerging powerhouse of a bank with 4,6m account holders (a 17% improvement over 2005).
And it would be churlish to deny what seems to be a wholesale improvement since the Post Office made its first operating profit in 2004 — its first such success since it opened for business in Cape Town in 1792.
In the past year, the Post Office has been in the headlines for all the wrong reasons. CEO Khutso Mampeule fingered his predecessor, Maanda Manyatshe, for fraud, and was fired by communications minister Ivy Matsepe-Casaburri
Financial director Nick Buick says this upheaval is a thing of the past: the Post Office (with a new board) has stabilised.
But dig a little deeper and the recovery story looks less convincing.
For one thing, contingent liabilities for various lawsuits are close to the R1bn mark. In its financials, the company notes a R514m legal claim by suppliers of a biometric system and another R119m claim from various “service providers” who are suing it for axing contracts. There is also a R269m claim from Manyatshe over future earnings he claims he lost over the Mampeule tiff. Other lawsuits include a possible R240m claim from Cade Transport over a three-year freight contract it didn’t get.
On the scale of these liabilities, Buick says: “One is never comfortable, but I think it’s manageable.” Yet they are more than double the R431m “operating profit”.
Even this profit doesn’t show the whole story of the Post Office’s “recovery”.
On its bottom line, the Post Office actually saw a 26% drop in net profit to R351m. Buick explains: “A few years ago we were insolvent and we had to fix the balance sheet. Until last year, we used to subsidise the medical aid contributions, but we don’t do this any more, only for those who have already retired.”
Overall, the medical benefit change meant this liability was reduced from R2,3bn to R900m — an “asset” that was apparently taken through the income statement and which boosted profits by R389m last year.
What is undeniable is that revenues grew by 8% this year, as more people used the Post Office to send mail.
Buick says: “We have been improving for the past three years, as a result of steps we’ve taken to drive down costs in areas like transport. Previously, there was a culture of spend, spend, spend.”
The Post Office has a lengthy list of targets, and seems to be meeting most of them. For a start, 92,5% of all mail items now arrive on time.
But operationally, the Post Office also failed to meet a number of key targets, including reducing the number of customer complaints by 10%. In fact, this went the wrong way, as there was a 20% increase in customer complaints.
But a profit is a profit, and it means that the Post Office now has R4,5bn in cash sitting on its balance sheet.
So it comes as some surprise to see that government still intends leaving bulging suitcases full of taxpayers’ cash at the Post Office headquarters — over R1bn in the next three years. Government plans to give R363m for this year, R372m for the next and R383m for 2010 to be used for “future projects to be agreed upon with the shareholder”.
Last week, chair Vuyo Mahlati said the Post Office planned to spend R2,6bn over the next three years on building and upgrading post office buildings and improving information technology.
But why, with R4,5bn cash in hand, does government have to subsidise its spending spree?
Buick says that because of earlier losses, the Post Office was behind the curve in investing in various parts of its business that desperately needed it — such as IT infrastructure. “The state subsidy allows us to catch up,” he says.
He adds that a large portion of the cash on the balance sheet must be held to “cover the liabilities of the PostBank”. The PostBank has been perhaps the Post Office’s brightest success, contributing R100m to the bottom line. The Post Office doesn’t provide figures for the PostBank alone, but Buick says “it did make a profit last year” of around R50m.
With 2664 “branches”, the PostBank is in an enviable position. For one thing, it was one of the first banks to offer Mzansi debit cards. It now has a 40% market share of Mzansi accounts.
In all, PostBank now has R2,6bn in deposits, and the Post Office plans to take a big punt on financial services, offering insurance products and microloans. “We are looking to diversify, and will focus on financial services and our courier side. With Internet mailing, for one thing, there is lots of growth on the courier side,” Buick says.
The courier and freight group made R7m in losses last year, though this is down from losses of R91m two years ago.
The Post Office is still protected by a monopoly on delivering parcels of less than 1kg. But this has gradually been reduced, and since the monopoly was cut from 2kg, the Post Office’s market share has dropped 4% to 94%, as rivals such as PostNet have muscled in.
With the writing on the wall for its conventional business, the Post Office needs to add impetus to its expansion in the financial arena.
Vuyo Mahlati Plans to spend R2,6bn over next three years.
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