SAA: Parliamentary Budget Office briefing; Committee Report on Division of Revenue Amendment Bill

Standing Committee on Appropriations

13 November 2017
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

Document handed out: PBO Presentation [awaited]

The Parliamentary Budget Office (PBO) briefed the Committee on the key financial issues facing South African Airways (SAA) in order to provide guidance to Members when engaging with departments and entities. The briefing was based largely on SAA’s financial performance reports, including the preliminary results for 2016/17. The PBO looked at the financial situation in terms of assets and liabilities, with a particular focus on debts, and underscored how other airlines performed. Most of this information on financial performance was in the public domain.

Various developments within the aviation industry were looked at from the perspective of problems surrounding the industry. Growth had been expected for the long term, but this had not happened. A significant problem picked up was related to the geographical location of the carrier, as airlines faced problems depending on which hemisphere they were in. This had impact on financial stability. For example, the Emirates had an advantage of being based in the upper hemisphere. However, New Zealand’s airlines were performing well, even though it was not well placed.

The PBO reported there was a question of leadership stability at SAA. The Ethiopian airline was doing better because of stable and strong leadership, and they were able to make sound decisions. SAA had a shortage of staff and it took time to take a decision and ages to come up with new strategies. There was no energetic, dynamic and strong leadership.  The government had given SAA R5.8 billion to see whether it could deal with all its issues. The airline was struggling with its cash flow, and the bail out would enable the airline to engage with its creditors. The support for SAA had been in terms of increasing guarantees, which had moved from R1.3 billion to R19 billion for the last five years – an increase of 1 200%. Certain conditions had been attached, and the salient question was how these conditions had been made and whether the bail-out fell within the budgetary framework.

There was an indication that SAA would need further injections from government. Income had been declining since 2016. However, the airline had not yet finalised its financial performance report for 2017. Expenditure was more than income. The operational costs were high and increasing. This led to the question of its financial stability and whether it would be able to meet its operational costs.

Members remarked that SAA should not be compared with Emirates, which was strategically placed and flies around the whole world, but should rather be compared with other African airlines. They commented that in certain instances, its poor performance was due to shortages of staff. Because the airline was not making money, there were arguments that it should be privatised. However, privatisation did not necessarily mean an improvement or making money. What private business could do, the public sector could also do. Proper operations were dependant on good and effective management. There was concern that SAA had lost lucrative routes out of Africa to European and Middle Eastern Airlines. It was also suggested that it was affected by a low asset base because it had sold its fleet of aircraft in favour of leasing. Members concluded that in order to get to the root of the problems at SAA, its challenges had to be viewed from a historical perspective.

The Committee considered the Committee’s draft report on the 2017 Division of Revenue Amendment Bill for adoption. The Bill was adopted without amendment, along with the draft report. 

Meeting report

Parliamentary Budget Office (PBO) on SAA key financial issues

The Chairperson asked why the presentation had not been shared with Members prior to presentation.

Dr Dumisani Jantjies, Deputy Director: Finance, responded that there had not been enough time to prepare for the briefing. The timeframe that they had been given was changed and they had to reschedule everything in order to meet new deadline.

The Chairperson said the Department’s office had communicated with her office and requested to present on Monday. There could be no excuse, as it was had been their office that had made a formal request. It was not the Committee that had requested them to present on Monday. She had given permission – after a request was made – to come and present. It was disappointing that they had come to present without documents.

Mr A Shaik Emam (NFP) said that they should be allowed to present, but should go through the presentation at a slow pace.

Dr Jantjies said the presentation summarised key issues that could provide guidance to Members when engaging with departments and entities. There was no print out, as they thought that they would be talking to the issues of South African Airways’ (SAA’s) finances without the use of PowerPoint. The presentation was to brief the Committee on what the Parliamentary Budget Office (PBO) had found so far on key issues that were identified for engagement with stakeholders. It was a formal request made by the Committee that the PBO should provide updates on the financial situation of SAA.

The Auditor-General South Africa (AGSA) was busy with the SAA’s finances. The PBO had looked at the SAA’s financial performance report, including the preliminary results for 2016/17. They had looked at the financial flows and financial situations in terms of assets and liabilities, with particular focus on debts, and had underscored how other airlines performed. Primarily, most of this information on financial performance was in the public domain. Various developments within the aviation industry were looked at from the perspective of problems surrounding the aviation industry.

Despite challenges, growth was expected for the long term. The PBO had picked up some risks that they had to allude to. For the economy to grow, it was good to remove some inherent limitations, especially inherent risks associated with the sector. Whenever there was an engagement with SAA, it was great to focus on the challenges and risks that it was facing. The significant problem that was picked up was related to the geographical location of the carrier. Airlines faced problems depending on in which hemisphere they were based.  This could have an impact on financial stability. For example, the Emirates had an advantage of being based in the upper hemisphere. New Zealand airlines were performing well, even though it was not well placed.

There was a question of leadership stability. An example was the Ethiopian airline that was doing better because of stable leadership, which enabled them to make sound decisions. With SAA, there was a shortage of staff and it took time to take a decision and ages to come up with new strategies. There was no energetic leadership.

The government had given SAA R5.8 billion to see whether it could deal with all its issues. The airline was struggling with its cash flow, so it could then engage with its creditors. The Minister had invoked section 16 to provide additional funding. There had been a legal discussion to see whether this was possible. The support of the SAA had been in terms of increasing guarantees, which had moved from R1.3 billion to R19 billion over the last five years -- an increase of 1 200%. Certain conditions were attached to these bail outs. The salient question was how these conditions were made and whether the bail-out was falling in the budgetary framework.

There was indication that SAA would need further injections from the government. Its income had been declining since 2016 and it had not yet finalised its financial performance reports for 2017. Expenditure was more than income. The operational costs were high and increasing. This led to the question of financial stability. The question was whether SAA would be able to meet its operational costs.

Discussion

Mr A Shaik Emam (NFP) said he did not understand how hemispheres affected airlines. SAA should not be compared with Emirates Airline, because Emirates was strategically placed and flew to the whole world. SAA was, however, well placed because all Africans who wanted to travel the world had to come to Johannesburg. All the Southern African Development Community (SADC) countries made use of Oliver Tambo Airport. SAA should therefore be compared to other African airlines. There should be a report on how all other African airlines were performing.

The functioning and operation of SAA was problematic, because 50% of it was not functioning normally. In certain instances, this was due to shortages of staff, in addition to leadership instability. However, no breakdown of the instability at the top, medium and lower levels of management had been presented.

 He asked what the real problem with SAA was, because other airlines were making money. There were arguments that it should be privatised because it was not making money, but he was against this move. Privatisation could not imply there would be an improvement, or making money. What private business could do, the public business could do too. Proper operations were dependent on good and effective management.
Did the PBO believe that SAA’s finances would recover, despite continuous borrowing and getting deeper into debt? SAA’s four-year report on its financial performance was shocking. Of serious concern was that government could not continue to bail SAA out. What could be done to turn around SAA? Was there any new strategy that could be recommended with a view to responding to the problems identified by the PBO?  South Africans should be proud of SAA. The problem was that it had a low asset base and had adopted the approach of leasing, rather than purchasing.

Mr B Topham (DA) said the budget of SAA amounted to R10 billion, and asked whether this budget was neutral. SAA needed a supply chain management (SCM) process which was efficient.

Ms D Senokoanyane (ANC) remarked that a fleet of aircraft had been sold and, as a result, they had had to lease. Did the PBO have any information on this? The assets that were being leased once belonged to the country. She was concerned with the issue of bailing SAA out, in particular the R5.8 billion involved. In the media, there were different messages, including the one from the chairperson of SAA. He had said it was not true that government had not bailed it out, and that the money had been received from lenders. It seemed that they believed that they had a guarantee to receive money from other lenders.

 She was also concerned with the issue of preliminary income, which had been declining for the last five years.  According to the PBO, the preliminary income had shown an increase of 2% compared to 2012’s preliminary income. How could one say that there was in increase and a decrease at the same time? What could be the reasons of the huge losses of SAA? Would this have to do with operational costs in the context of fruitless and wasteful expenditure, or did have something to do with a corruption?

Dr Jantjies responded that the hemisphere in which an airline was based affected whether it was operating internationally. The functioning of the airlines could be affected by the problem of where they had to stop for refuelling. At SAA, there had been various turn-around strategies in recent years

With regard to expenditure, certain things had not been budgeted for. Added to this, many commodities were bought in foreign currency, especially dollars, and this impacted on the budget. If the South African currency depreciated, this meant more money had to be paid. It was difficult to budget in the face of inflation, because one would not know how much the inflation would be. The financial performance report showed that there had been increases in expenditure the field of manpower (labour) and energy. Income levels were growing, but in terms of comparative analysis, the income seemed to decline. In real terms, the level of revenue seemed to be where it had been for the last four years. It was not growing significantly. The international airlines were doing better than SAA, perhaps because they were taking advantage of African routes. There had been discussion on whether one would pay less when one leased, rather than purchasing.

On bailing SAA out, Dr Jantjies responded that the Minister had indicated that there was a bail out. If one had a budget framework, one had a contingency plan. The expenditure could be drawn from the contingency plan. The AGSA had predicted that the expenditure could go beyond the ceiling.

Dr Jantjies commented that SAA was partly privately owned. Of paramount importance was to understand how SAA operated in the aviation section. This had been overlooked. Since 1991, there had been deregulation of the aviation sector, leaving SAA and British Airways staying in the market without government intervention. SAA had lost significantly on capitalising on the African routes. There were so many routes travelling to the world through Johannesburg. European airlines were capitalising on these routes. This had resulted in a huge loss to SAA, as it was not taking advantage of these routes. Ethiopian airlines and Emirates were taking advantage of these routes and were performing well financially.

Another problem to think about was the effectiveness of the funding model used by SAA. In 2017, there was a gross loss of R1.4 billion within a period of 11 months. If the budgeting techniques were realistic, there was no way an entity could go under budget by R2 billion. There had been a serious loss because of currency exchange rates, and this should be taken into account. However, SAA should be certain of what the loss could be in terms of inflation.

Ms Senokoanyane commented that SAA was not capitalising on South African routes. She asked why there were, for example, no SAA flights from Cape Town to Durban.

Mr Shaik Emam said there were allegations that SAA was run from offices based in the United States of America, and asked whether this was true. The question of inflation could not be invoked as an excuse, since all airlines had to exchange their currencies in order to buy fuel or other commodities. He asked why local routes had been allocated to foreign airlines and not to SAA. The PBO should prepare a comprehensive report on at least 20 African countries’ airlines with reference to their financial performances and operational management. The report would help to find out what was wrong with SAA.
He suggested that policies might be a source of its financial problems and asked how funds might have been lost in terms of compliance with aviation policies. His main concern was the salient question of how the real challenges faced by the SAA could be identified. What the role could the PBO play in an effort to identify the real challenges? Could SAA make its own presentation on its challenges? It was crucial for the Committee to know what the challenges on the ground were in order for it to intervene.

Ms S Shope-Sithole (ANC) said the PBO should play its role of advising the Committee on proper interventions the Committee could take. However, in order to get to the root of challenges, SAA should be understood in its historical context. A report on its financial performance history was required. With history at hand, the Committee would be able to see how problems had started and grown, and how these problems could be addressed. Problems were increasing because SAA had no consequence management, and a lack of consequence management led to ineffective leadership. On the other hand, it should be noted that there were people who wanted to bankrupt SAA so that it could be privatised. This issue was serious, given that the economy of South Africa was so fragile. The move to bankrupt SAA should be discouraged, as no risk should be taken. Members should do their work of oversight. Oversight was the main responsibility of the Committee. They should also contribute to the economy of South Africa. Therefore, the PBO should conduct a survey to demonstrate how many Members utilised the services of SAA or foreign airlines.

Mr Topham commented SAA was not an asset but a liability, because it was not bringing in income. A good solution to SAA was to liquidate it, create another company called SAA, and sell the same brand.

Mr Shaik Emam said what Mr Topham said was partially correct and not entirely correct. He raised his concern over the majority of shares in SAA that were owned by foreigners.

Ms Senokoanyane commented that Members should bear in mind that they were discussing SAA with a particular focus on how it could be revived and function properly. They were interested in other airlines, such as British, Emirates and Ethiopian.

Mr Topham commented that the shareholding in SAA was compliant and consistent with South African laws.

Dr Jantjies reiterated that the purpose of the presentation was to provide Members with updates on the financial performance of SAA. He would take serious comments, suggestions and inputs of Members and where more research was needed, it would be conducted. The PBO would report back to the Committee.

Draft Report: 2017 Division of Revenue Amendment Bill

The Chairperson took the Committee through the draft report paragraph per paragraph. She said that the Division of Revenue Bill had been tabled on 25 October 2017 by the Minister of Finance during the presentation of the 2017 Medium Term Budget Policy Statement (MTBPS). The Bill had been referred to the Committee on 8 November, and the Committee had received a briefing on it from National Treasury. The Committee should consider the draft report on the Bill for adoption.

Page 4

Mr N Gcwabaza (ANC) suggested that the word “purposes” should be “purpose.”
The Chairperson suggested insertion of “comma” in the paragraph under bullet two.

Mr Gcwabaza suggested insertion of “is” in the paragraph under bullet six.

Page 5

Mr Gcwabaza suggested that after the phrase “local business”, the phrase “especially SMMEs and Cooperatives” should be added.

The Chairperson asked whether CoGTA should not be written in full as “the Department of Cooperative Governance and Traditional Affairs (CoGTA). It was agreed that it should remain as it was.

Page 6

The Chairperson commented that Outcome 9 should be referred to in full for future readers to know exactly what Outcome 9 either entailed or referred to.

Page 7

Ms Shope-Sithole, referring to finding 9.2, said that the word “funds” should be in the singular.

Page 8

Referring to finding 9.3, Mr Gcwabaza said that the word “non-compliance to”, should be “non-compliance with,” and after local businesses, the phrase “especially SMMEs and Cooperatives” should be added.

Referring to finding 9.6, Ms Shope-Sithole expressed her concern over the word “critical,” and felt that it could be changed. Members agreed that the whole paragraph should remain as it was.

Page 9

Referring to recommendation 10.1, the Chairperson sought clarity on whether the verb “effect” was right word to apply.

Mr Gcwabaza supported the use of the verb “effect.”

Ms Shope-Sithole agreed.

The Chairperson said that the word “malaria” should be inserted after the word “TB”.

Referring to recommendation 10.2, Mr Shaik Emam suggested that the word “consult broadly” should be removed.

Mr Gcwabaza suggested that “consult broadly and develop” should rather be removed.

Mr Shaik Emam said the Committee should be interested in the progress of reversing the culture of non-compliance. Therefore, the paragraph under bulletin 4 should be revised.

The Chairperson agreed.

Mr Gcwabaza agreed. He also remarked that the paragraph should be revised to reflect that reporting on initiatives and progress were required.

The Chairperson said that the word “progress” should be incorporated.

Mr Shaik Emam said the paragraph should talk about and emphasise innovation, because what local governments were doing was not working. Innovation in the strategies and approaches was needed

The Chairperson agreed. She also commented that the word “audit” for audit outcome should not be in plural.

After completing the correction of grammatical errors, the Bill was adopted without amendment.

The Chairperson noted that the DA abstained from adoption of the report.

The Chairperson thanked the Committee for its full participation and noted that the report would reflect on the Announcements, Tablings and Committees (ATC) during the night.

Committee business
Mr Gcwabaza announced that the Minister and Deputy Minister and Director General would not be available for next Wednesday’s meeting. Members should take the decision as to whether it should go on as planned or be cancelled. He had received the information from the Communication Liaison Officer.

The Chairperson asked the Committee Secretary to read the agenda for Wednesday.

The Committee Secretary said National Treasury was among those due to present on Wednesday.

The Chairperson said meetings could not keep on being postponed. Time was critical. It was at the end of the year. The Committee had the power to summon a Minister and Deputy Minister. The Committee should not get information from the Communication Liaison Officer. The Minister should have written to the Committee. There was a procedural process to tender an apology that the executive authority should follow.

Mr Shaik Emam said that there were compelling reasons for the Minister of Finance and other senior officials to be outside of the country. He had heard that they were attending an important meeting which had something to do with the economy of nations. They had to be there. However, there should be a written apology.

Ms Shope-Sithole said that the Chairperson should write to the Minister and emphatically state that in future they should tender a written apology. She did not support the subpoenaing of senior executives. The Committee should be careful when subpoenaing ministers. They should be mindful of the economy which could be disturbed in cases where some important meetings might not be attended. The Minister, along with National Treasury, national labour teams and businesses were outside of the country to discuss important matters to ensure that the South African economy was not downgraded.

The Committee agreed to accept the apology from the Minister.

The Chairperson said that the Minister had to be present when engaging with certain matters.

Mr Gcwabaza said that either the Minister or Deputy Minister ought to be present.

The Chairperson agreed. She thanked Members for their sacrifice in being present, as Mondays were days for political party business.

The meeting was adjourned. 

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