SABC Presentation to Parliamentary Portfolio Committee of Communications 16 th August 2011

SABC Presentation to Parliamentary Portfolio Committee of Communications

16th August 2011

Chairpersons Report1

Strategic Focus2

Points for Discussion

SABC Structure 4

Operational 5

Government Guarantee Targets5

Contents

Conclusion & Recommendations6

Contents

2

• In the application for a Government Guarantee, by the Interim Board of the SABC, (09 Oct ‘09), a detailed

outline of the funding requirements to maintain the SABC as a going concern, were conveyed to the Minister of

Communications, Hon General (Ret) Siphiwe Nyanda.

• The amount of the Government Guarantee requested was R1,473Bn and was additional to the R200 million

allocation to the SABC in the 2009/10 Adjustment Estimates of National Expenditure.

• The GG application was based on the SABC's Corporate Plan, which dealt with the organisation's key

performance areas for the MTEF Period 2009 to 2012. It also articulated a turn around strategy designed to

stabilise the SABC and return it to profitability by 2012, while fulfilling the SABC's Public Broadcast Mandate.

• It was intended that the GG be used to secure medium-term funding from commercial banks, funding which

would restore liquidity to the organisation and enable the sign-off of the SABC's Audited Financial Statements

and the External Auditors' Report, for the year ending March 2009.

• The request for the GG met the requirements of the Public Finance Management Act as well as the Treasury

Regulations and the application supported the SABC's Mandate, it's objectives and those of the Government

as a whole.

Although challenging, a number of objectives have been achieved

Chairpersons Opening Remarks

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4


Strategic Focus2


SABC Structure 4

Operational 5


Contents


Contents

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Strategic drivers Both internal and external factors have influenced the performance of the SABC over the last few years, resulting in poorer than expected performance.

• Conflicting and often competing business objectives

• Silo behaviours

• Ineffective brand and image management

• High reputational risk

• Financial instability• Commercial viability

threatened

• Enabling and support structures suboptimal

Internal Business Perspective

TV Radio News Sport Commerce

Core Functional Value Chain Perspective

External Stakeholder Perspective

Government PublicInternational

Groups

Finance Perspective

Funding Commercial Sales Cost efficiencies

Resource Perspective

Staff & Skills Technology (DTT) Infrastructure Enablers

The Turnaround Programme has already shown an improvement in each of the above perspectives and will continue to drive improvements for the SABC.

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Strategic Focus2


SABC Structure 4

Operational 5



Contents

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SABC Structure

Group Chief Executive Officer

(GCEO)

Executive Director post

Structure Key:

Group Executive or General Manager post

Office of the GCEO

Chief Audit Executive

Company Secretariat

Strategy, Innovation &

Planning (Perf Eval.)

Group Finance Officer (CFO)

Chief Operating Officer (COO)

Legal & Regulation

Sport News Radio TVProvinces & Stakeholder

Relations

Commercial Enterprises

Human Capital Services Risk

Future Media & Innovation

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Strategic Focus2


SABC Structure 4

Operational 5


Contents


Contents

Recovery, Stabilisation & Sustainability: A clearly defined strategy for long term success

Financial Challenges have been addressed

For example we have reduced the amount of money owed to us by Debtors (those who owe us money)

R 150 m of old Debt was collected in June

SABC’s Ability to produce and broadcast enhanced

Increased Advertising from a year ago

Regained and improved our Market Share by 2%

Financial Challenges are being addressed

Turnaround

We are a going concern

Repaid R 110 m of Nedbank Loan ahead of schedule

Cash Flow Stable

Improved Cash Flow for the SABC which means that there is enough cash in the bank to continue operations

We have over R500 m cash available in the bank

The SABC continues as a Going Concern

Cash Flow

Focused and Motivated Management Team

Good experience in Broadcasting

United team with specific goals

Head of Audit appointed 1/8/2011

Improved Processes

Improved processes for easier ways of working in core functional areas

Enhanced SABC support functions such as HR and Finance to enable the SABC to better achieve its primary goals

Business Efficiency and easier ways of working

Management

Organisational AchievementsThe SABC is making good progress towards stabilisation.

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• Turnaround Strategy approved, Recovery achieved, now in Stabilisation phase• Plan of action established to address the recommendations contained in the AG Report• The Board has adopted a set of Corporate Pillars that informs the SABC’s Strategic Focus areas and

operational plans• Revised operating model and structure developed and being considered by the Board• Performance contracts signed with all Executives for the 2012 fiscal

Strategic Goals Achieved

Stakeholders

Broadcasting Successes

• Briefing to all political parties on Local Government Elections • Consultations with The Ministry of Sport & Recreation and the Portfolio Committee on Sport as well as

engagement with sporting bodies on the development of a new sport strategy for the SABC• Commercial relationships stabilised• International content supplier relationships stabilised and local content relationships improving

• FIFA 2010 Soccer World Cup• Delivery on language and local content mandate• Celebration of 150 years of the arrival of Indians to South Africa• India/South Africa cricket tournament• Cricket World Cup• Coverage of Local Government Elections – a Great Success!• Re-launched digital media platforms• SABC is also an award winning broadcaster, collecting the most awards at the 2010 SAFTA Awards as

well receiving a number of international awards

Operational Achievements – FY 10/11 and to dateThe past fiscal has seen the enterprise attain other major achievements for the SABC

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Strategic Focus2


SABC Structure 4

Operational 5


Contents


Contents

• Profit of R93m in 2008 to a loss of R790m in 2009 as a result of

operating expenses and employee costs which had risen

drastically as well as various operational and management

inefficiencies

• Free cash flow problems prevented the organisation from

honouring payments of its committed contracts and commissioned

local content productions

Improved Cash Flow, Profit Recovery, Good Performance against Budget, Turnaround Benefits

• The Interim Board secured a Government Guarantee to the value

of R1.473 billion from National Treasury in order to obtain a term

loan from a financial institution, namely Nedbank

• The initial R1 billion rand was used to eliminate the solvency

crisis the SABC experienced in 2009/10

• The amount funded was conditional on meeting strict conditions

and criteria set by National Treasury.

• The remainder of the amount requested, being R473 million

would be made available on meeting additional requirements,

however the SABC will not be accessing this additional facility

Objectivere-alignment

Nedbank Term loanGovernment Guarantee

Government Guarantee BackgroundThis document outlines the current and projected financial performance of the SABC against the requirements of the Government Guarantee. The main objective of the report is to re-align the requirements of the Government Guarantee within the current operating conditions

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FY10/11 FY11/12 forecast

FY10/11 FY11/12 FY10/11 FY11/12

R'000 R'000 R'000 R'000 R'000 R'000

Revenue

Advertising 3 504 715 3 613 472 3 501 000 3 878 000 3 715 (264 528)

Sponsorships 483 937 565 600 607 000 704 000 (123 063) (138 400)

Trade exchange revenue 64 977 127 796 99 000 104 000 (34 023) 23 796

TV Licences 872 050 909 334 933 000 968 000 (60 950) (58 666)

Government Grants 145 257 145 465 208 000 191 000 (62 743) (45 535)

Other 222 506 251 029 221 000 236 000 1 506 15 029

Total Revenue 5 293 442 5 612 696 5 569 000 6 081 000 (275 558) (468 304)

SABC GOVERNMENT DIFFERENCE

SABC Financial Performance vs. Government Guar. TargetsThe Total Revenue performance for FY2010-2011 has grown by 10% year on year. For FY2011-2012 we have prepared a business case that seeks to align the GG financial targets with the financial targets of the SABC.

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FY10/11 FY11/12 FY10/11 FY11/12

R'000 R'000 R'000 R'000 R'000 R'000

Less: Expenditure (5 328 315) (5 494 331) (5 583 757) (5 590 455) 255 442 96 124

Amortised Prog, Film & Sport rights (1 595 860) (1 469 679) (2 004 000) (2 008 000) 408 140 538 321

Broadcast costs (327 254) (376 256) (309 000) (326 000) (18 254) (50 256)

Signal Distribution (495 070) (550 494) (495 000) (523 000) (70) (27 494)

Employee Compensation & Benefits (1 705 338) (1 627 562) (1 476 000) (1 422 000) (229 338) (205 562)

Marketing (108 709) (230 992) (234 000) (245 000) 125 291 14 008

TV Licence Collection cost (126 677) (189 275) (194 000) (205 000) 67 323 15 725

Professional and Consulting Fees (167 121) (158 702) (113 000) (36 000) (54 121) (122 702)

Other Opex costs (283 745) (408 569) (324 210) (318 131) 40 465 (90 438)

Other Personnel costs (47 999) (42 901) (86 910) (85 280) 38 911 42 379

Other Admin costs (26 007) (64 115) (31 637) (31 044) 5 630 (33 071)

Other (profits)/losses (2 785) (1 002) - - (2 785) (1 002)

Other Impairments (169 342) - - - (169 342) -

Employee Benefit re-evaluations - (86 169) - - - (86 169)

Depreciation of PPE (272 408) (288 615) (316 000) (391 000) 43 592 102 385

Operating profit before interest and tax (34 873) 118 365 (14 757) 490 545 (20 116) (372 180)


Austerity measures implement continue to bear fruits as expenditure is contained and well within budget. For FY2011-2012 we have prepared a business case that seeks to align the GG financial targets with the financial targets of the SABC.

SABC Financial Performance vs. Government Guar. Targets

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FY10/11 FY11/12 FY10/11 FY11/12

R'000 R'000 R'000 R'000 R'000 R'000

Less: Net Financing loss (84 537) (105 909) (213 243) (262 545) 128 706 156 636

Interest Received 42 771 11 744 - - 42 771 11 744

Interest Paid (127 308) (117 653) (213 243) (262 545) 85 935 144 892

Profit/ (Loss) before income tax (119 410) 12 456 (228 000) 228 000 108 590 (215 544)

Income Tax - - - - - -

Current year Income Tax (9 861) - - - (9 861) -

Profit/ (loss) for the year (129 271) 12 456 (228 000) 228 000 98 729 (215 544)

Plus: Other comprehensive (loss)/gain - -

Pension fund - -

Actuarial gain 267 605 267 605 - - 267 605 267 605

Change in paragraph 58 limit of IAS 19 - employee benefits (306 295) (306 295) - - (306 295) (306 295)

Post -employment medical benefits - -

Actuarial loss (80 081) (80 081) - - (80 081) (80 081)

Gain in changes in fair value of available-for-sale financial assets 391 391 - - 391 391

Income tax relating to other components of other comprehensive income 33 201 33 201 - - 33 201 33 201

Total comprehensive loss for the year (214 450) (72 723) (228 000) 228 000 13 550 (300 723)


SABC Financial Performance vs. Government Guar. TargetsThe Corporation has continued to deliver impressive operational and financial performance and that is evidenced by the reduced operating loss of R129m vs. the GG target of R228m.For FY2011-2012 we have prepared a business case that seeks to align the GG financial targets with the financial targets of the SABC.

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Description Actual vs. Variance

FY 10/11 FY 11/12

Advertising Revenue No major Variance Market Fragmentation continues to affect advertising revenues

Sponsorship Revenue

The compilation of the Sponsorship targets in the government guarantee targets was incorrect. The market perceived the SABC Sponsorships as expensive.

The compilation of the Sponsorship targets in the government guarantee targets was incorrect.

Trade Exchange RevenueDid not meet target due to struggling to conclude significant trade exchanges in the 3rd and 4th quarter

TV LicenceThere was a delay in the finalisation of the Debt Collection tenders, resulting in targets not being met

The compilation of the TV Licence revenue when the government guarantee targets were drawn up assumed an annual increase in TV Licences

Government Grant Capital expenditure was slow for the period hence the lower revenues

Other Revenue No major variance

SABC Financial Performance vs. Government Guar. TargetsVariance analysis of the Revenue performance

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SABC Financial Performance vs. Government Guar. TargetsAnalysis of the Expenditure performance. The benefits of the austerity measures are evident.

Description Actual vs. Variance

FY 10/11 FY 11/12

Amortisation of Programme, Film and Sports Rights

There were foreign exchange savings on the FIFA 2010 Soccer World Cup rights fees in line with the economic analysis and foreign exchange trends

This line item is related to strategies of acquisitions of programming. The budget does not take into account Content required for DTT and 24 Hour News Channel

Employee Compensation & Benefits

Employee compensation & benefits performed R229 million below government guarantee targets. This line item is head count related

The current budget is based on reduction of headcount and conversion to Cost to Company packages

Marketing costs

Marketing Costs performed well below set targets as the business implemented cost cutting measures which have begun to realise benefits

No major variance

TV Licence Collection costsThere was a delay in the finalisation of the Debt Collection tenders, resulting in targets not being met

No major variance

Depreciation of PPE

Depreciation of Property, Plant and Equipment was below set targets as the Capital Expenditure for 2010/11 was slower than anticipated

No major variance.

Financing Costs

Finance costs performed favourably against set targets as the SABC did not require the 2nd tranche of the government guarantee which was included in the government guarantee targets.

Finance costs have been budgeted below set targets as the SABC will not require the 2nd tranche of the government guarantee which was included in the government guarantee targets

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300 000

653 798

55 375

(229 806)

49 988

(446 985)

(1 379 835)

(1 736 310)(1 609 858)

(3 733 057)

31 924

402 649

(4 000 000)

(3 500 000)

(3 000 000)

(2 500 000)

(2 000 000)

(1 500 000)

(1 000 000)

(500 000)

-

500 000

1 000 000

R'000 R'000 R'000 R'000

FY10/11 Proj FY11/12 FY12/13 FY13/14

R'00

0

Financial years

36 Month Cash Flow ForecastLevel of Cash safety

Base model

Base model excluding Turnaround achievements

Adjusted Base model including Turnaround achievements, risk and opportunities and no MTEF funding

Base model including Turnaround achievements, risk, opportunities and MTEF funding

36- Month Cash Flow Scenarios and Financial PerformanceA number of cash flow scenarios have been modelled as shown below. The scenario(s) below clearly indicates the benefits of the turnaround work currently under way and the need for the MTEF funding requests to be approved.

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Importance of Approving the MTEF RequestSABC has made progress in turning around the organisation. In order for the SABC to continue with these initiatives and remain a going concern, it is imperative that the funding request is approved

AG Report Progress Cost Reduction Strategies Revenue Enhancement Employee Defined Benefits

Quality of Reporting• A performance

management system has been developed and training is underway

Effective Governance• A number of corrective

actions have been identified

• Development is underway

Adequate Leadership Oversight

• A number of corrective actions have been identified

• Development is underway

Note : The detailed progress report and project plan is available

Four areas were identified for improvement: 1.Reduction of operational expenditure;2.Head count reduction,3.Conversion to Total Cost of Employment;4.Reduced leave liability

•The combined effect of these cost cutting initiatives was a further reduction of R104 million of operational costs during the year ended 31 March 2011

•Over the past two fiscal periods, operational expenditure has decreased by 36% (as per audited financial statements).

A number of revenue enhancement initiatives were identified:•Trading and Pricing Model to be implemented FY 12/13•Yield Strategy•Outsourcing Sponsorship Revenues ( R115m benefit)•TV Licence Increase•Government Subsidy - Concessionary TV Licence - LSM Households

•The combined effect of this will result in an increase in the revenue totalling at least R800 million (as per budgeted figures) during the financial year ended 31 March 2012

The key intent for Total Costis to naturally curb thegrowth in the long termLiability;• One way of doing this is

through Total Cost of Employment, where benefit costs are capped and any increases that are in excess of the company contribution is funded by the Employee

• Consultation with the business has begun and as a result benefits are starting to be realised

• Employee compensation and benefits have reduced from R1.753 billion in 2010 to R1.705 billion in 2011 (as per audited financial statements)

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Strategic Focus2


SABC Structure 4

Operational 5


Contents


Contents

FY10/11 Proj FY11/12 FY12/13 FY13/14SUMMARY OF MTEF REQUESTS R'000 R'000 R'000 R'000DTT (OPEX, CAPEX) - - (323 564) (854 161) TV Licence LSM 1-3 Subsidy - - (205 000) (205 000) TV Licence Concessionary Subsidy - - (143 000) (143 000) Sport - Development and minority - - (26 446) (29 302) National Sporting Events of Public Interest - - (271 380) (466 501) DTT - Sport channel - - (311 737) (521 016) News 24 - - (106 365) (114 200) Elections (National) - - - (34 964) Digital Library (OPEX, CAPEX) - - (131 190) (90 480) Low power transmitters - - (20 000) (15 000) HCS - Training in line with Turnaround - - (28 300) (20 300) HCS (OPEX) - - (74 800) -

- - (1 641 782) (2 493 924)

Plus: VAT - - (229 849) (349 149)

- - (1 871 631) (2 843 073)

1. DTT

2. Development of Sport of

National Interest

3. News 24

4. National Elections

5. Retrenchment costs

6. Digital Play-out centre

and Digital Library

RecommendationIn order for the SABC to meet its obligations in the normal course of doing business, the Board believes that six key strategic initiatives need to be funded by government

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Based on the analysis above it is evident that the Corporation continues to improve its performance both in

terms of revenue and cost reduction.

For the next financial year(s), we have prepared a business case which clearly outlines the optimal

performance of the SABC. The next step is to align the GG targets with the operational and financial

performance of the corporation as outlined in our 36 month financial performance projections.

We recommend that the Government Guarantee conditions be amended based on new forecasts as per

Actual Results achieved in FY 2010/11 and the 36 month cash flow forecast model.

It is important to take note that these forecasts exclude all current MTEF requests including DTT.

Recommendation

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Documents

SABC Presentation to Parliamentary Portfolio Committee of Communications 16 th August 2011