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The Kroll Report: Media Pack and Questions

The Kroll Report: Media Pack and Questions

Sunday 10 Feb 2002 Rodney Hide Press Releases -- Governance & Constitution

What was the Deal?

NZ Post's $54 million contract with SAPO was signed in July 1999. The deal was that NZ Post's international consultancy Transend would provide key executives to restructure the business and implement a commercial development strategy prepared by Transend. The South African Cabinet terminated the contract in May 2001 with 18 months to run. The stated reason for termination was "non-delivery". It is understood that the South African government refused to pay for the full contract and that financial penalty clauses were invoked.

What is the Kroll Report?

The Kroll Report is the private and confidential report of the investigation into the financial affairs of the South African Post Office (SAPO) by independent Auditors Kroll Associates and Nkonki Sizwe Ntsaluba Inc. The investigation was undertaken for the Minister of Communications. The draft preliminary report focuses on why the South African Post Office failed to break even by 31 March 2001 as promised by NZ Post. The Kroll Report notes, `Government accepted that the SAPO would break-even at 31 March 2001 and we understand that consequently no subsidy for the SAPO was provided for in the financial years thereafter' (para 31).

NZ Post maintains the Kroll Report is "materially flawed" and has "strongly refuted" its allegations.

CEO Claims NZ Post obtained contract "under pretence"

South African Post Office CEO Mr Manyatshe claims that NZ Post Transend Project Director Mr Garry Whale told him in front of witnesses that NZ Post had "submitted a break-even budget because that was the only way that they were going to get the contract. They knew, they were fully aware that the break-even point was not possible" (para 52.3). The CEO claims that, "it really shows that these guys obtained the contract under pretence". Following Mr Whale's statements the CEO immediately informed the Director-General and the Deputy Director-General of the Department of Communications and sought legal advice on their implications.

In their response to the draft Kroll Report, Transend state that "there are two conflicting accounts of the alleged statement by Mr Whale. For the record, the parties present at the meeting to whom Transend has spoken, deny the statement was made as recorded by Manyatshe".

Mr Manyatshe told the auditors that he was quite prepared to make his claim under oath and swear to it.

The promise of break-even by 2001 was the key to NZ Post winning the contract. Mr Manyatshe makes it plain: "the New Zealanders were chosen because their bid was self-funding" (para 32). By contrast, Canada Post -- the other shortlisted company bidding for the contract -- said it was not possible to restore the entity to profit in three years, given the amount of work needed at the organisation.

CEO made allegations to Transend in March 2001

SAPO CEO Mr Manyatshe wrote to Transend on 29 March 2001 declaring:

"Garry Whale made the statement that at the time of preparing the bid for the SMP contract New Zealand Post International put forward a break-even bid for the South African Post Office despite being fully aware that a break-even position was not achievable during the specified timeframe. The breakeven budget was presented to ensure that the contract was awarded to New Zealand Post International.

The proposal on break-even as put forward by NZPIL in the contract has led to the decision by Government to discontinue the payment of subsidies to the Post Office. The message that Government would no longer be supporting the Post Office financially was also conveyed to the media and general public.

As you are aware, the present financial position of the Post office requires further substantial financial assistance from Government for which provision has not been made. Needless to say that this change in circumstances has created, and is still creating, considerable embarrassment for both Government and the Post Office. However, the biggest disappointment is the fact that the expectations that had been created of a Post Office that would be self-sustainable within a short period of time are now not going to be realised."

The response of NZ Post was to ask that the letter be retracted pending an immediate face-to-face meeting. The CEO found NZ Post's response unsatisfactory and considered it a damage-control exercise.

CEO details Transend Shortcomings

Mr Manyatshe claims that, "the actions of the New Zealanders were contrary to everything. I will give you some examples. When I arrived there were some backlogs on things to be signed. I was given things to be signed. Then after two or three days I asked for the cash flow statement, then I realised that the guys don't have a cash flow statement. It took them some time to develop a cash flow statement. To me that told me there was no focus on the turnaround. . . . There were no cash-flow statements -- money was just being spent without somebody seeing whether there is money. The attitude which I found amazing which was prevalent in the Post Office, including the New Zealanders, was that this is in the budget, or this is in the contract. Nobody ever went back to say do we have the money to fund that" (para 38).

"I showed them how the capital spent has grown big time without the revenue following. In fact, since the coming of the New Zealanders, the capital spent of the company has gone up almost like two-fold how much the guys had been spending on capital. And that was done without anyone going back to the cash flow to say, do we have cash to afford it" (para 39).

"I had a meeting with PriceWaterhouse in which I said can you tell me what is going on in this organisation because it seems like this organisation is in some sort of chaos. And they told me that for this year and whatever it is, they gave me the impression that before things seemed to be under control, but for the last year and some bits things had just got out of control completely" (para 40).

"When I talked about getting the costs right, getting the turnaround strategy, everybody talked to me about staff reductions. . . . I also sat down with PriceWaterhouse Cooper who were the advisers of the New Zealanders during the bid, and they told me that they sensitised the New Zealanders to the realities, social and political realities of South Africa, that there is no way that you can come and try to go on rapid staff reduction -- that there is no way that you can come and start with rapid staff reduction in South Africa because of where the country comes from and the history that we have, because employment is one of the prime concerns of the government" (para 43).

"In fact if I can put it in blunt terms is that the New Zealanders were managing the company by projects, and the projects were uncoordinated and not fitting to one another, and none of those were fitting to the turnaround. . . . There was generally no overall plan to turnaround the Post Office" (para 41).

The Kroll Report noted that the CEO experienced Transend as not being concerned about the undertaking to break-even, that cash flow statements were only developed at his insistence, that expenditure was being incurred without due regard to cash flow, and that when he assumed duty the turnaround process was in disarray with no focus on bottom line improvement.

What NZ Post Chief Executive Elmar Toime said in May 1999

On May 16 1999, NZ Post Chief Executive Elmar Toime declared that, "Winning the SAPO contract confirms New Zealand Post's reputation as the global benchmark in postal services. Under the strategic management partnership contract, NZPIL will provide key executives to turn around SAPO's operational and financial performance, eliminating the need for government subsidies."

How much was lost

The loss to 31 March 2001 was 744 million ZAR ($NZ228 million at the then exchange rate). South African newspapers reported that the South African government had to extend a 500 million ZAR ($NZ150 million) lifeline to prop up SAPO. They also reported that NZ Post had been paid 100 million ZAR ($NZ30 million) on the contract.

Questions that must be answered

1. Why hasn't NZ Post been privatised and why isn't it subject to full commercial accountability?

2. What did NZ Post achieve for South Africa, what was it paid, and are the claims of the South African Post Office (SAPO) correct?

3. What are the terms of settlement between NZ Post and South African Post? Has New Zealand Post had to pay compensation? If so, how many million and what for?

4. What is Mr Whale's version of what he said when SAPO's CEO Mr Manyatshe claims he told him that NZ Post had "submitted a break-even budget because that was the only way that they were going to get the contract" even though "they were fully aware that the break-even point was not possible"?

5. Why can't NZ Post Chairman Dr Ross Armstrong recall seeing the Kroll Report and was the Report in fact given to the Board in August as claimed?

6. Why did the Directors of NZ Post agree to purchase 35 percent of the Island of Malta's Post Office when by their own admission they haven't bothered to read the Kroll Report on their venture into South Africa?

7. Why didn't NZ Post make the Kroll Report available to the Finance and Expenditure Select Committee when asked for and why did NZ Post say it didn't have a copy?

8. Did NZ Post keep the New Zealand government fully briefed on its difficulties in South Africa especially as the government-owned enterprise was clearly causing the South African Government political and financial embarrassment?

9. What action has the New Zealand Government taken to ensure good relations are maintained with the South African Government?

10. Does Prime Minister Helen Clark consider the behaviour of NZ Post acceptable?

11. Is the behaviour and performance of NZ Post in South Africa the behaviour expected of a state-owned business presenting itself as having the necessary integrity to run successfully a "People's Bank" as required by the government?

12. How come every portfolio under Minister Mark Burton is deeply dysfunctional, in a mess and under inquiry?

Rodney Hide MP

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