Air Traffic and Navigation Services, South African Civil Aviation Authority & ACSA on their 2016 Strategic & Annual Performance Plan

Meeting report

An apology for absence from the Minister of Transport was received and noted. The Acting Chairperson welcomed the Members and the delegation from the entities, but expressed his displeasure over the absence of the Chairman of the board of directors of the South African Civil Aviation Authority (SACAA).

Briefing: Air Traffic and Navigation Services (ATNS)

Mr Thabani Mthiyane, Chief Executive Officer (CEO): Air Traffic and Navigation Services (ATNS), said that the 2016/17 budget for non-regulated business targets reflected a higher amount for regional airports, amounting to R45 329 735. This was followed by the Southern African Development Community (SADC) VSAT II, amounting to R42 274 886, and the NAFISAT, amounting to R32 670 859. The lowest budget allocation amount was R721 566, for rental.

To ensure the financial viability of ATNS as a state-owned enterprise, as well as the importance of corporate governance in the public sector, a clean unqualified audit opinion had been maintained over the years. ATNS was in partnership with the Department of Transport (DoT) and other stakeholders to bridge the gap between urban and rural representation in aviation opportunities – the Letsema learnership programme  and the aviation transformation roundtable work tirelessly towards achieving black representation in the sector. In the light of Broad-based Black Economic Empowerment (BBBEE), ATNS had made some significant improvements with the minimum of 51% black-owned and 30% women-owned supported businesses. It therefore intended to:

•           Increase spending on enterprise and supplier development; and

•           Gear its procurement policies towards localisation, with specific targets to transform the provision of aviation related services.

With regard to community development, the organisation had spent R1 226 576 on developing poor communities, and in this financial year the target was R2 million.

Briefing: South African Civil Aviation Authority (SACAA)
Ms Poppy Khoza, CEO: Directorate for Civil Aviation (DCA), SACAA, reported on the employment trends of the organisation. The current total staff numbers were 453, and the target for the current financial year was 503. The challenges that would be addressed going forward were the black female representation in technical staff and the general spending on procurement. Blacks were leading in terms of the demographics of employment within the organization, currently sitting at 101. This showed that the organisation had worked hard to ensure that transformation within the organisation continued.

Industry transformation statistics revealed the following:

• 8% of pilots were Africans, Coloureds and Indians;
• 14% of engineering personnel were Africans, Coloureds and Indians;
• An overview indicated male dominance in the statistics for South Africans;

There had been a healthy growth in helicopter and aeroplane licensing for the nine-months ending December 2015. The ‘other licences,’ which included cabin crew, aircraft maintenance engineers, balloons, flight engineers and student licences, were on the decrease by 2%.

The SACAA had engaged in the following initiatives for economic transformation:

• The National Transformation Strategy, which was led by the DoT to address industry transformation;
• The introduction of the Remotely Piloted Aircraft Systems (RPAS) regulations, enabling crime prevention on missions such as anti-rhino poaching;
• Funding of 31 SA youths in pilot, engineering and aircraft mechanics, to address the untransformed aviation personnel statistics;
• Employment of graduates in the internship programmes, contributing to job creation and youth empowerment;
• Training the members of the SA Network for Women in Transport (SANWIT) women in effective bidding and supply chain management, to foster women’s participation in aviation;
• Spending 67% of the budget since 1 April 2016 on small, medium and micro enterprises (SMMEs) and cooperatives.

Critical projects in the current financial year would involve the SACAA in the 2017 International Civil Aviation Organisation (ICAO) audit readiness, the pursuit of revenue enhancement and diversification of income streams; providing quality input into the DoT transformation process, relocation to new premises, Enterprise Business System (EBS) implementation, and the Financial Investigation Unit (FIU) strategy.

The SACAA remained financially sustainable and was pursuing additional revenue streams. A recognition agreement had been successfully concluded with labour in January 2016. The Regulator had reviewed and contributed to the amendment of the Civil Aviation Act and the finalisation of Chapter 4 was imminent. Preparation for the upcoming ICAO audit in 2017 was on schedule and was being implemented in accordance with the ICAO readiness project plan. Emphasis would be placed on improved communication and stakeholder management. Cost containment measures were being duly implemented and would be further strengthened. As a state entity, the SACAA contributed to economic transformation by implementing youth, women and SMME development initiatives.

Briefing: Airports Company of South Africa (ACSA)
Mr Bongani Maseko, CEO: Airports Company of South Africa (ACSA) reported on the strategic context of the organisation, saying that it was important that the company established momentum across multiple horizons in order to drive sustainable growth. Horizon 1 focused on extending and defending the core business of ACSA; Horizon 2 focused on building emerging businesses and driving medium profit growth; and Horizon 3 looked into creating viable options to ensure the company’s longer term future.

The net profit for the current financial year was projected to amount to R442 million, which was the lowest the organisation had experienced in comparison with previous years, although the forecasts were indicating higher net profit amounts. The return on assets had been at its highest in 2014, at 10.8%, whilst the return on capital employed was at its highest in 2015, at 11.2%.

The credit rating agencies had given the organization a negative rating. ACSA’S credit rating was underpinned by the ownership of a network of key infrastructure assets, a strong and diverse service area, a well-invested and appropriately dimensioned asset base, a moderately leveraged financial profile and a reasonably conservative financial policy. Its credit rating was constrained by economic regulation that eschewed the pre-funding of capital expenditure, exposure to the South African Airways group, and volatile domestic economic conditions.

Forecast revenue would be positively impacted by the delay in the Permission decision -- a tariff reduction had been budgeted for, but no changes to tariffs had been effected for the 2015/16 financial year. In addition, traffic volume increases should exceed expectations. Expenditure was forecast to be slightly lower than budget, partly due to the introduction of austerity measures during the year to offset unbudgeted expenditure increases. A profit of R1.8 billion was forecast against a budget of R1.2 billion, mainly due to the impact of the higher revenue.

Discussion

Mr C Hunsinger (DA) asked where the Blesberg Mountain, which was reflected in the ATNS presentation, was geographically located. There were 31 sites that had been identified with Distance Measurement Equipment (DME) systems, and he expressed concern about the terminal guidance of these DME systems at the 31 sites. With regard to the secondary airports, there was a widening gap in the technological upgrading of equipment. There was a concern that the domestic airports, which had significant importance in the economy, were being neglected.

With regard to the Random Navigation (RNAV) routes, which would lead to shorter and faster routes and economy on fuel consumption, as well as reduced carbon emissions, he asked how the improved technology would lead to these routes and how it would affect air traffic in general. Were there any benefits for international funding, particularly considering it would contribute to reduced carbon emissions? How would the new technology be maintained, and what provisions had been made in long term agreements for developing skills and expertise in the new technology, so that South Africa could develop its own markets?

Mr M de Freitas (DA) asked whether the students that had been provided with funding under the bursary scheme were expected to work for the organisation on the completion of their studies, and what the terms and conditions of the bursary scheme were.

He said there seemed to be a delay in dealing with queries. What were the causes of the delay in responding to the queries related to licensing? Why was the organisation relocating? He asked about the internships and the funding of pilots, and whether they were also expected to work for the organisation when they had completed training.

Mr M Sibande (ANC) asked for verification from all of the presenting organisations about achieving their goals in terms of the medium term strategic framework (MTSF), the National Development Plan (NDP) and the State of the Nation Address (SONA), and whether they had complied with them. He said some of the entities had been given guidelines, but in terms of performance it was difficult to follow through on what was necessarily needed within a particular period.

He asked about the Epicon system which was normally used for safety at airports.  Was there anything similar at Mthatha airport, because at Nelspruit it had taken a very long time to obtain it, and if it had not been installed at Mthatha, accidents would occur? He lamented the fact that despite the B-BBEE programme, when black businesses were given tenders of more than R10 million there was always an urge to investigate the legitimacy of the awarded tender, because there was often the perception of corruption being involved. So what was actually meant by the 51% figure for B-BBEE businesses reflected in the presentation -- was it for actual businesses, or for lousy tuckshops or spaza shops? He asked about the financial implications of environmental protection for the infrastructure and projects outside the country. With regards to civil and military navigation, what was the relationship between the organisation and the military, and how often did the entity meet, because keeping the country safe involved engaging with the military.

He expressed concern about the mechanisms that existed within the organisation for the recruitment and marketing of the organisation adequately to increase awareness of the need for black people and women in the organisation. He asked whether the SACAA was ready for the ICAO audit, because in the past there had been challenges identified within the organisation’s operations, which included many non-aviation businesses importing, the regulation of pilot aircraft systems, and guidelines in aviation perspectives not being easily achieved. He was concerned about private landing strips and whether they were conforming or not with the regulations, because they used the same routes where commercial airlines travelled. There had been a challenge in the past over the ownership of operators of model aircraft in respect to commercial activities. Lastly, he asked for clarity on issues related to Remotely Piloted Aircraft Systems (RPAS) operation demands.

Ms S Xego (ANC) acknowledged the zero debt:equity ratio in the ATNS financial information, which meant that the organisation was self-sustaining. In the previous year, the Committee had assigned the ATNS to mobilise resources for disaster centres, and she asked if the centres were still under the organisation or now with the Department. She congratulated SACAA for achieving a gender balance in its top management positions, but asked if there was a general perception that women were not fit or confident enough for these top management positions.

The Chairperson asked for clarity from the ATNS on its strategic linkages, and whether there was any alignment with the government’s medium-term strategic framework. With regard to the consolidated cash flow statement, he asked about the large increase in expenditure and what had motivated it.

He asked SACAA when the Auditor-General was expected to audit the organisation. What were the numbers of the members that had benefited from the training? Lastly, with regard to the relocation of offices, it seemed as though the rental premium had escalated significantly, so was the organisation going to own its new premises or were they going to be leased, because it seemed like there were insufficient funds available at the moment to meet all of these costs.

Mr Mthiyane, responding on the questions directed to the ATNS, said Blesberg was geographically located near George in the Western Cape, and was part of the Swartberg mountain range. It was one of the unique areas in South Africa, with over 200 flora species found in that area alone. ATNS had radar infrastructure there and the area was also used as a satellite location. The infrastructure had been built under very stringent conditions to ensure that the sanctuary of the area was retained.

Regarding the Distance Measurement Equipment (DME), when the ATNS planned for the nine airports it took cognisance that the organisation managed and controlled the airspace in the country which by default included regional airports. All its planning did incorporate the regional airports, and the project that dealt with the DME was really a fall-back in preparation for the migration to new technology, which would be controlling and navigating through satellite technology and infrastructure. The DME project would be used as a fall back in cases where there were problems with the satellite infrastructure and it did include all the regional airports.

The Random Navigation routes were currently operating in straight routing, which was essentially point to point -- the previous technology flew in a zig zag format before this new technology had been introduced. This project would run until 2030, as required by the International Civil Aviation Organisation, and was well known as PBN (Performance Based Navigation). It dealt with procedures which were being modified for coming into airports and landing. For example, in Cape Town the length that an aircraft flew had been reduced, which as a result reduced the amount of fuel burnt and emissions. It had positive impacts on the airlines and ultimately the environment, and it was currently being rolled out in the country, including the regional airports.

With regard to maintenance, in the past ATNS had tried bring in expertise in order to localise maintenance and make sure that a project was done by one entity. However, currently a project was being broken down to different functionalities to levels where local companies were able to come in and assist with a particular function of the project. The local companies had been provided with incubation to ensure the maintenance skills were brought into the country and retained. He emphasised that the process had been slow, as 80% of the actual infrastructure came from overseas. However, there had been a drive for localisation to ensure that some of the infrastructure was built locally. The limitation had been that local suppliers had only one customer, which was ATNS, and the organisation purchased this type of infrastructure only once in a 15-year cycle.

With regards to the bursars, ATNS was creating a labour pool for itself so that if there was space for employment within the organisation, the bursars could be absorbed by the organisation, otherwise they were allowed to seek employment elsewhere.

The organisation was aligned with the government’s medium-term strategic framework and other relevant statutes, and they were all catered for in the corporate plan of the organisation. However, the organisation looked beyond aligning itself with just the MTSF and other local frameworks, but also with international benchmarks and standards.

The current technology had evolved from the previous one, the Epicon, which due to its past susceptibility of failure was currently being decommissioned. The Mthatha airport was partly operated from the East London airport, so some of its operations -- particularly the management of airspace -- were not necessarily at the Mthatha airport. It was providing only the tower, which was basically controlling an aircraft once they saw it, the rest of control being operated from either East London or O.R. Tambo International Airport.

The ATNS’s contribution to B-BBEE was not viewed from a stationery or catering type of empowerment, but by developing the industry within the aviation space so that the organisation could incubate some of the companies. The organisation was not concerned about the public perception of tenders awarded to black-owned businesses amounting to R10 million, because the processes were conducted above board and properly. The ATNS wanted to work with companies in order for them to grow within the industry and not just award them projects and walk away on completion of the project.

The air traffic management (ATM) community involved everyone who was using the airspace, which also included people coming from the recreational side who used balloons. In light of the environmental impact, the organisation had decided to use the legislation as a baseline in any area where the organisation operated, if there was nothing in existence within that particular area. There were guidelines globally in terms of what to do and what not to do, so it was ensuring that whatever it did met the guidelines and was not in violation of the legislation. It ensured that international standards were also met in the process.

The ATNS met with the Department of Defence very frequently, with scheduled meetings taking place quarterly, and there was a permanent military member who sits in the O.R. Tambo airport.

The disaster management centre was fully functional, to the extent that neighbouring countries could request assistance in disaster-related matters within their territories. However, it was now under the Department, and ATNS was a member along with other organisations such the Civil Aviation Authority, the Defence Force, maritime etc.

With regard to the increased expenditure, the organisation was planning to build new offices and a new academy, which would require external borrowings.

Mr William Ndlovu, Chief Financial Officer (CFO) at ATNS, shed some light on its contribution to B-BBEE. Currently it had spent about R450 million, 40% of which had gone to black businesses, and the organisation was looking at increasing that figure.

Ms Khoza answered the questions put to the SACAA. She said the delays in relation to queries resulted from challenges that the organisation was facing, but were mainly due to the organisation’s restructuring. However, plans had been made to ensure that they did not persist, and the delays had already decreased drastically.

The relocation was taking place because the organisation was running out of space. Currently they were occupying two buildings, which affected the customers’ convenience, while sometimes some relevant documents were in the other building, which affected the current flow of operations significantly. The organisation was in contact with its sister agencies, like ATNS and ACSA, negotiating favourable rates and terms and conditions to make use of their land while concurrently ensuring that supply chain processes were not flooded and negatively affected by the transition.

Regarding funding for pilots, the organisation absorbed some of their bursars if there was space, and those that were not absorbed were released to seek employment elsewhere within the industry, where and they did receive good jobs due to the quality of the skills they received from SACAA. The lack of recruitment had been mainly due to the restructuring process that was currently taking place. The organisation was only recruiting skills that were needed for now. There were now about 53% blacks currently occupying the inspectorate positions, followed by 26% of whites.

On the ICAO audit, the organisation was almost ready and had requested the regional ICAO office based in Nairobi to provide a pre-audit in order to get a sense of where the organisation was in terms of its readiness. There was now a unit that looked at the general compliance on a day-today basis, and the indications from the internal structures were that SACAA was ready for the audit, although an independent opinion was going to be consulted.

The Minister of Transport had approved the regulations and SACAA had started implementing them, and so far that had been going very well, although there had been additional requirements promulgated. If people wanted to operate commercially, they needed to go through the Air Service Council for licensing, and that had also been going quite well. With regard to the private airstrips, this was one of the areas which were before the civil aviation regulations’ ad hoc committee. SACAA had appealed to the industry to register all private strips, both known and unknown, but they would not be inspected.

The organisation put women at the centre and had partnered with a number of women’s organisations to assist in restoring confidence in women within the industry. The Auditor-General’s audit would commence on 11 April 2016. The number of women that had received training thus far was about 60 in Gauteng province, which was where the training had commenced, but the training programme was going to be rolled out to all provinces across the country, and the set target was 3 000 trained women.

Mr Asruf Seedat, CFO at SACAA, said the organisation had allowed for a 10% increase in the rental charge going forward for occupying the new premises, but more affordable alternatives were currently being consulted. The plan was to pay off the rental charge over time, but in terms of the Public Finance Management Act (PMFA), the organisation could lease up to only a maximum of ten years if it was operating under an operating lease. A longer lease of up to 20 years would require the permission of the Treasury. All compliance requirements were being considered and the decision about the most favourable option would be adopted going forward.

Mr Hunsinger asked about the challenges of expanding direct flights and the increase in airlift capacity, as well as the limitations currently being faced in airport capacity. When was ACSA going into commissioning expansions, because he enthusiastically followed the planning stages in the Western Cape with other entities involved? He asked if there was a sense of urgency and necessity to chase this to the stage where contractors started the operation.

He also asked for an update on the five-year tariff, because of the very worrisome comments in the Finch ratings, which stated that ‘’there was continued uncertainty about the price regulation.’’ These comments referred to policy, and they were maintaining a very negative outlook on ACSA. He asked about the content of the loan agreement, and how ACSA intended keeping that alive and the organisation afloat, as it seemed like a fragile matter. He sought clarity on the repayment particulars and the default margin of the loan.

He expressed his concern about the cost of landing and parking aeroplanes, and whether the charges were competitive. According to his personal contact in the industry, airlines were not interested in coming to Cape Town airport because they could not afford it, so the country was missing out on opportunities. With parking and landing generating 64% of the organisation’s revenue, could the organisation not consider expanding the remainder of its revenue and perhaps have a type of subsidisation, just balance it out and attract more parking and landing from airlines.

Mr De Freitas (DA) said internationally airport companies were reaping turnover benefits with regard to the use of commercial space, and maximising that space. What was ACSA’s stance towards taking advantage of that? He asked about the condition of the current premises and why ACSA needed new premises.

Mr Maswanganyi (ANC) expressed his concern about the comments of the credit agencies, particularly where they were aligning ACSA to political connections. The organisation was consequently struggling to obtain good credit and was being punished for something it had nothing to do with.

The Chairperson asked for some assurance that ACSA had been able to answer the Auditor-General’s comment that ACSA had not done well in terms of the supply chain processes. Could it assure the Committee that it had addressed that issue in its annual performance plan?

Mr Maseko said there were covenants that had been set as benchmarks in order not to breach or default on the loan, so if any of those covenants were breached they would trigger a R11 billion loan recall. There were different sources from which ACSA received funding. However, there was a correlation with all its debts, and so the loan agreement dictated that if any other loans were defaulted on, that would also trigger the repayment of creditors or other sources of borrowed funding.

With regard to the landing charges, there were two issues that were important. The first was the reality that if ACSA did not get what it had requested, it would be difficult to fund operations. Secondly, there was the diversification of the business as a whole, so that the organisation did not rely solely on the landing and parking charges aspect of the business. However, the revenue would be directly affected because these charges contributed about 64% into its revenue streams, and the economics of the organisation would be negatively affected. Other ways of generating more revenue were much needed. In terms of the retail strategy, some of the revenue came from retail shops within the airports, and the organisation was focusing on this aspect to ensure an increase in its revenue stream. A retail transformation strategy had been implemented to achieve diversification in that space and ensure that more people were able to participate. Opportunities were currently being explored across the airports to generate more revenue.

Ms Maureen Manyama, CFO of ACSA, said that following the Auditor-General’s findings, the company had prepared an audit response plan which had been prepared last year before coming to Parliament to present the audited financial statements. The financial year had just ended, and ACSA would be evaluating whether the initiatives that had been introduced had achieved the desired results. Over and above that, regarding issues around the supply chain management function, the internal auditors had been this function of the organisation before the external auditors commenced with auditing work so that they could close any gaps that existed. Therefore, the function was being monitored very closely and would be reported on again in the final quarter.

With regard to the loan, it was also stated in the loan agreement that the payback would also be triggered by a forecast default of any loans, and whether that default occurred in three or four years was irrelevant.

Mr Tebogo Mekgoe, Chief Operating Officer (COO) of ACSA, said that there had been a lot of planning on strategies around traffic development. ACSA was currently in discussions with a few airlines on the subject of increasing their frequencies to Cape Town, as well as with local municipalities in terms of guidelines on strategic land use.

The meeting was adjourned.