SA Rail Commuter Corporation Limited Financial Arrangements Bill; Air Traffic & Navigational Services: briefing

Meeting report

TRANSPORT PORTFOLIO COMMITTEE
27 September 2000
SOUTH AFRICAN RAIL COMMUTER CORPORATION LIMITED FINANCIAL ARRANGEMENTS BILL; AIR TRAFFIC AND NAVIGATIONAL SERVICES: BRIEFING

Documents handed out:
South African Rail Commuter Corporation Limited Financial Arrangements Bill [B64 -200]
Slide Presentation of SARCC Limited Financial Arrangements Bill - text only [see Appendix 1]
Slide presentation on Air Traffic and Navigational Services - text only [see Appendix 2]

SUMMARY
The Department of Transport gave a briefing on the take-over of the South African Rail Commuter Corporation debt by the Government through the SARCC Limited Financial Arrangements Bill.

The Air Traffic and Navigational Services gave a briefing predominantly on their future plans for the South African region as well as internationally.

MINUTES
South African Rail Commuter Corporation (SARCC) Limited Financial Arrangements Bill
Cabinet had, as early as 1993, taken a decision that the national government should take over the SARCC debt. Subsequent to that, numerous meetings had been held with the Department of Finance. This resulted in the production of the Draft Bill and memorandum, which had been circulated to the Ministers of Finance and Public Enterprise before being formally submitted to Cabinet. Both Ministers had been fully supportive of the move. However, due to the 1994 national elections the process had been delayed. In 1999 the Minister of Finance requested the Department of Transport to continue with the process. This gave rise the South African Rail Commuter Corporation Financial Arrangement Bill to enable the national government to take over the SARCC debt and to cancel its borrowing powers.

The reason for the take-over of the SARCC debt was that the SARCC was not in a position to pay back the loan as it provides subsidised services to the poor of the poorest. The other reason is premised on the belief by the government that SARCC should not have been required to borrow.

As part or a condition to the take over of the debt, the government has also decided to withdraw the SARCC borrowing powers except for bridging finance as determined by Minister of Transport in consultation with Minister of Finance.

The Minister of Finance will now be responsible for setting up maximum amounts to be lent to the SARCC if the need arises. The SARCC will not be in a position to make guarantees other than subsidiaries day-to-day operations. The debt is at present standing at R2 500 million.

Discussion
(Q) How does SARCC spend its money?
(A) Ms Nothnagel (Department of Transport): The budget is made of operations, maintenance and payment costs.

(Q) Mr Cronin: Is there no pension fund dimension to the debt?
(A) Mr van Niekerk (SARCC): No

(Q) How far is the process of concession and how is it going to be done?
(A) Ms Nothnagel: We are busy designing a pilot project in the Rand area. It will start in 2002. We will see after we have advertised the concessions if there is any international interest or not. There will be an open bidding for 90% of the assets.

(Q) Do we still have any rolling stock outside the country?
(A) Mr van Niekerk: No, we have never had rolling stock outside the country.

Air Traffic and Navigation Services (ATNS)
Dr van Vollenhoven, Managing Director, briefed the committee as follows:

Vision of ATNS
It aims to be the preferred supplier of air traffic and associated services to the African continent and surrounding regions.

Mission
- To provide safe, orderly, expeditious and efficient air traffic, navigational and associated services.
- Meeting world-class standards by: adding value to clients by meeting their expectations; developing and training employees; providing real returns for shareholders and complying with all legal and statutory requirements.

Key Values
- Open, honest, communication and information sharing.
- Superior quality service and customer focus.
- Innovation and continuous improvement.
- Wealth creation and added value.
- Trust, respect and equity.
- Aviation safety
- Participation and teamwork.
- Continuous training and development.
- Clean, healthy and safe work environment.

Commitment to the Shareholder
- World class air traffic services.
- Ensure safe navigation.
- Deliver a real return.
- Key role player in aviation safety.
- Employer of demographically representative workforce.
- Active role in aviation development in the region.

Funding Mechanisms
- Fair and equitable tariff charges: charged for each aircraft flight; based on distance traveled and mass taken on weight and compare favourable with international tariff levels.
- Capital Projects: Two sources of funding: (i) internally generated cash, (ii) borrowing from local financial institutions.
- Future expansion: (i) international borrowings, (ii) gearing level not higher than 40% and (iii) cost effective, structured finance options.

SMME Development
- We have a Black economic policy dating back to 1996. The procurement committee makes sure that the policy is applied when making procurements.
- In respect of capital projects, equipment is internationally sourced whilst civil works is out-sourced to the local SMMEs.
- Services like the property attorneys, joint statutory audit appointment, cleaning, are scrutinised for advancement programs.
- As regards insurance issues, we are trying to empower SMME's. For an example ATNS and ACSA jointly tendered and appointed SMME for the short-term insurance at Cape Town and Durban.

Employment Equity
Methodology of Implementation
- Employment equity is a key performance area of all management levels.
- Succession planning for all management levels.
- Establishment of mentoring programmes.
- Competency based recruitment system is currently in use. Competency is very crucial because we are providing a service.
- Fair selection processes.
- Accelerated development of potential staff.
- Review of job descriptions and profiles to identify or remove non-relevant barriers.

Monitoring of Progress
To monitor progress on equity we have an Executive Management team, Board Human Resource committee, and the Employment Equity Act steering committee. The Board also reports every second month about employment equity, gives quarterly feedback to staff and has given a clear dispute procedure.

Development Programmes
Leadership
The current senior managers are going through leadership workshops and training. Developing and training of employees are very critical because we are providing a service and therefore competency is crucial.

Technical Management
We are running joint programmes with the French Embassy, like the Masters Degree in air traffic management. Already we have sent out three Black engineers for 15 months of training.

Future Plans 2000-2003
Global trends impacting on future strategy
- There is reduced traffic because airlines are forming alliances.
- There is a growing demand for increasing service value.
- Technology is leading to regional service.
- There is flexible use of airspace and therefore we cannot keep on saving pockets of airspace for the military.
- International Alliances: (a) service provider to service provider and (b) supplier to provider.
- There is privatisation of Air Traffic Service (ATS) companies. By 2005 there will only be around about six ATS providers worldwide.

ATNS vision to be achieved by 2003
- To be the comprehensive ATS provider within South Africa
- A partner in the SADC upper airspace control company
- Bilateral partnership in the region - we are busy investigating partners in the SADC region.
- That the income will be 80% airline and 20% from other operations - which core revenue will grow to 20% of core revenue.
- That the company structure of ATNS will accommodate the following: alliances; non-South African activities because we have to work across our borders; and technology access.
- That ATNS will be a preferred employer in the ATS industry.
- We will strive to be a representative employer.
- And that we will continue to be the responsible member of the community.

Regional Projects
SADC Progress
We are trying to forge regional co-operation with SADC members in matters of civil aviation. To that effect the Communications Navigation Surveillance/Air Traffic Management regional concept was approved in the regional civil aviation committee meeting in April 2000. A protocol for such regional co-operation is already in place. Currently funds are being secured by SADC for final scoping and feasibility for the regional provision. Details are being finalised to conclude the work.

Issues and Challenges
- The greatest that we are facing is in respect of the sovereignty of airspace. This has become worse by the military requirements that we have to observe.
- National telecommunication.
- Lack of specialised resource in the whole of the SADC region.
- The duplication of tasks and efforts is a great risk.
- Streamline regulation
- Dual membership of regional groupings.

Future Actions to 2003
We are planning to consolidate regional groupings using International Civil Aviation Organisation (ICAO) area routings. The envisaged typical groups would be the following:
- SADC
- Commission for East and Southern Africa (equivalent to the SADC states in East Africa)
- ASECNA - A French company, like ATNS, situated in West Africa.
- MAGHREB.
In the process of consolidating regional groupings, we also plan to regionally align air routes and the infrastructure.

Benefits of regional service provision
- Seamless airspace and lowest cost infrastructure.
- Reduction of operating costs.
- Improved airspace capacity, security and aviation safety.
- Wealth and job creation in the civil aviation and other industries.
- Economics of scale due to standardisation and elimination of duplication.
- State obligations in terms of ICAO Convention will be met.
- There is also a possibility of third party financing.

Mitigate perceived risks to participating countries.
- There might be a problem when it comes to the sovereignty of airspace because of the tug-of-war for the control of the airspace between civil aviation authorities and the military authorities.
- Currently states are liable for airspace accidents. The problem is who is going to bear liability when it comes to multinational services and /or systems.
- Concessions will have to be made for the service provision model.
- There is bound to be a loss of income in the form of compensation and cross subsidisation of domestic service provision.
- There is also bound to be problems when in comes to funding and ownership issues.

SADC Upper Airspace Projects (UACC)
Key Issues for RSA ATNS
- Which RSA upper airspace should be included?
- What is going to be position in relation to the military airspace?

SADC UACC Project
Key Factors
- We need to get our governments' view.
- Determine strategic negotiation position.
- We need to get a decision on military airspace.
- Determine the geographic position of the UACC.
- Work out the financial impact of the SADC UACC Project on ATNS.
- Establish the importance of the SADC skies.
- And get the views of the other SADC states.

Discussion
Mr Magubane (ANC): How many people in top-level management are from previously disadvantaged backgrounds?
Dr van Vollenhoven: At the Board level, there are three people from previously disadvantaged backgrounds. At the level of senior management, there is still a very thin representation. However, there are a lot of previously disadvantaged people at the middle management level.

Ms Shilubane (ANC): How many Blacks are training to be pilots in the Aviation Training Academy?
Dr van Vollenhoven: Of the 200 students in the Academy, currently 65 are Black. Over the last three years there has been a major increase in the number of Black students enrolling at the Academy.

Mr Slabbert (IFP): There was concern over the airspace safety in the past. What is the current situation?
Dr van Vollenhoven: Since Air Traffic Management was formed, our airspace has been considered the safest. There is, at present, no concern about airspace safety.

Mr Cronin (ANC): What are you doing to retain trained staff in the light of the high demand for South African pilots?
Dr van Vollenhoven: We are training an extra 10% to cater for that. This issue is being looked into seriously. If it means putting more resources to attract trained staff, then we will do that.

The meeting adjourned.

Appendix 1:

SARCC FINANCIAL ARRANGEMENTS BILL, 2000

REASON FOR THE BILL
· To enable National Government to take over the debt of the SARCC
· To cancel the borrowing powers of the SARCC

PROCESS FOLLOWED
· Numerous meetings held with the Dept of Finance and SARCC
· Draft Bill and Cabinet memorandum circulated to the Ministers of Finance and Public Enterprises before formally submitted to Cabinet
· Consent given by 2 Ministers

BACKGROUND
· Cabinet decision in 1993
· Delayed due to 1994-elections
· 1999 - Minister of Finance requested NDOT to proceed

MONEY BILL OR NOT?
· Constitutional Court ruled that charges against NRF do not need a Money Bill
· Legal opinion confirmed not a Money Bill

RATIONALE FOR TAKE OVER OF DEBT
· SARCC provides subsidised social service
· Will never be able to repay loans from own funds
· SARCC should never have been required to borrow
· Total loan debt consists mainly of capital expenditure although in some financial years funds had to be borrowed to fund operational short falls

WITHDRAWAL OF BORROWING POWERS
· Borrowing powers of SARCC withdrawn except for:
- bridging finance as determined by Minister of Transport in consultation with Minister of Finance
- Maximum amounts to be approved by Minister of Finance
· No guarantees by SARCC allowed other than subsidiaries day-to-day operations

MAGNITUDE OF DEBT
· Loans at 30 April 2000 = R2281 m
· Other debt = R 219 m
(non interest bearing)
· Total debt = R2500 m
· Budgeted by DOF for 2000/01
- Loan debt = R2281 m
- Interest until take over = R 183 m
- Total provision = R2464 m
· R219 m to be provided through NDOT's budget 2001/02

EFFECT ON SARCC BUDGET
· R355 m budgeted for interest has been reallocated to capital expenditure
· Total expected short fall provided by NDOT
· Capital allocation of R355 m also provided by NDOT
· R355 m does not represent the needs to maintain an ever deteriorating asset base

Appendix 2:

AIR TRAFFIC AND NAVIGATION SERVICES COMPANY LIMITED

Presentation Structure
· vision/mission/values
· stakeholder interaction
· what is air traffic services?
· key statistics
· financial performance
· value added projects
· staff development
· future service provision

The ATNS Vision
To be the preferred supplier of air traffic, navigational and associated services to the African continent and surrounding regions

The ATNS Mission
· to provide safe, orderly, expeditious and efficient air traffic, navigational and associated services.
· meeting required word-class standards by :
- adding value to clients by meeting their expectations
- developing and training employees
- providing real returns for shareholders
- complying with all legal and statutory requirements

The Key Values Are :
· open, honest communication and information sharing
· superior quality service and customer focus
· innovation and continuous improvement
· wealth creation and added value
· trust, respect and equity
· aviation safety
· recognition and reward
· participation and teamwork
· continuous training and development
· clean, healthy and safe work environment

ATNS / Stakeholder Interaction
[Graph not included]

Commitment To The Shareholder
· world-class air traffic services
· ensure safe navigation
· deliver a real return
· key role player in aviation safety
· employer of demographically representative workforce
· active role in aviation development in the region

Management / Board Structure
[Graph not included]

ATNS - Board Of Directors
Mr Glenn van Heerden - chairperson - commercial/strategic
(AVIS)
Mr Humphrey Khoza - director - commercial/h.r. (Uthingo)
Mr Jan Dreyer - director - legal (Rembrandt)
Mr Theo Bohlmann - director - financial(SERVGRO Int Ltd)
Me Mpho Emily Letlape - director - hr/it (IBM)
Me Thoko Mokgosi - director - marketing (TELKOM)
Mr Donald Masson - director - financial (retire mar 2001)
Mr Bill Ward - director - project/procurement
(retire march 2001)
Dr Johan van Vollenhoven - managing director

Air Travel Value Chain
[Graph not included]

Key Activities - Current Service
[Map not included]

Movement Per Major Airport
[Graph not included]

History Of Airline Activity
Aircraft Movement Growth
Percentage growth 1996 to 1999
International scheduled: 44%
Domestic scheduled: 25%
Other - general commercial and military: 50%
Total growth: 33%
1999/2000: 0%

Financial performance
Income Statements

Balance Sheets

Key financial ratios
(forecast)

Benchmarking Tariffs
[graph not included]

Funding Mechanisms
· fair and equitable tariff charges
Charged for each aircraft flight
Based on distance travelled and mtow
Compare favourable with international tariff
Levels
· capital projects
Two sources of funding :
Internal generated cash
Borrowings from local financial institutions
· future expansion
International borrowings
Gearing level not higher than 40%
Cost effective, structured finance options

SMME Development
· Black economic empowerment policy - 1996
· responsibility of procurement committee
Chaired by non-executive director
· capital projects
Equipment internationally sourced
Civil works outsourced to local SMME
· services
Property attorneys
Joint statutory audit appointment
Cleaning services
Other contractors - i.e. maintenance contracts
Scrutinised for advancement programmes.
· insurance
ATNS and ACSA jointly tendered and appointed SMME
For short term insurance at Cape Town and Durban

Value added projects
Capital expenditure
1994 - 2000

Value Added Savings
· R-NAV routes R15m fuel / year
· Waterkloof Airspace R4m fuel / year
· 20% increase in capacity Johannesburg International
Employment equity
methodology of implementation
· employment equity is a key performance area of all management levels.
· succession planning for all management levels.
· establishment of mentoring programmes.
· competency based recruitment.
· fair selection processes.
· accelerated development of high potential staff.
· review of job descriptions and profiles to identify/ remove non-relevant barriers.

Monitoring of progress
· executive management
· board hr committee
· Employment Equity Act Steering Committee
· Board reports every 2nd month
· quarterly feedback to staff
· clear dispute procedure

Numerical goals
Agreed with:
· Executive management
· Board
· Employment Equity Act Steering Committee
· representative bodies (trade unions)
· consulted shareholder

Development programme
1. Leadership
· current senior managers
· future manager potential
- job/skills match
- career path planning
2. Technical management - french programmes
joint programmes - atns/french embassy
- masters degree in cns/atm
- future technical management development
- 3 black engineers - 15 month course -
June 2000

Aviation training academy
ATNS/ACSA alliance
Vision
To be the preferred provider of aerospace industry training in Africa.

· ATNS internal training requirement levelled, external
Growth experienced.
· excess capacity to grow.
· world class equipment.
· internationally recognised.
· formally joined resources with ACSA.
· support from 15 African countries.

Future plans 2000 - 2003
Global trends impacting on
future strategy
· airline alliances (reduced traffic)
· demand for increasing service value.
· technology leads to regional service provision.
· flexible use of airspace.
· international alliances
Service provider to service provider
Supplier to service provider
· privatisation of ats companies.
By 2005 there will be only ±6 ats providers worldwide.

Future plans
cns/atm
Current status
· air traffic control - country airspace based
· ground based systems
· not efficient between countries
Regional projects
SADC
VSAT (satellite inter centre communication)
· all states involved and interconnected.
· IATA - partnership.
· communication support for CNS/ATM.
· regional success.

The key is co-operation
Regional projects
SADC - progress
· protocol in place.
· CNS/ATM regional concept approved :
Civil Aviation Committee (april 2000)
SADC transport ministers (june 2000)
· funding secured by SADC for final scoping and feasibility for regional service provision.
· finalising detail to conclude work.

Regional projects
Issues and challenges
· sovereignty of airspace.
· military requirements.
· national telecommunication.
· lack of specialised resource.
· duplication of effort is a risk.
· streamline regulation.
· dual membership of regional groupings.

Regional projects
Benfits of regional service provision
· seamless airspace & lowest cost infrastructure
· reduction in operating costs (airlines & sps)
· improved airspace capacity, security & aviation safety
· human resource/skills development
· wealth and job creation (aviation/other industries)
· economics of scale (due to standardisation and elimination of duplication)
· state obligations in terms of ICAO convention met
· third party financing possible

Regional projects
Mitigate perceived risks to participants
· sovereignty (civil/military co-ordination/control)
· service provision model (convention, agency, company, concession)
· ownership/funding
· loss of income (compensation, cross subsidisation of domestic service provision)
· liability (certification of mutilnational services/systems)

SADC - regional project
SADC upper airspace projects (UACC)
SADC - regional project
SADC UACC project
· why not RSA domestic airspace?

SADC - regional project
SADC UACC project
Factors
· RSA government view
· strategic negotiation position
· decision on military airspace
· geographic position of UACC
· financial impact on ATNS
· importance of safe SADC skies
· position of other states

Proposed structure
Why change structure
· risk reduction for ATNS
Commercial
Operational
· business unit focus
· facilitation of SADC interaction

Review of legislation
· company governed by ATNS act 45 of 1993.
· consistency between act and act of parliament such as :
Public Finance Management Act - Act of 1999
Civil Aviation Authority Act 40 of 1998
· minor changes in operational wording.
· amendments to support SADC initiative i.e. partnerships, alliances, shareholding etc.